[Financial Planning for the 100-Year Life] What Needs to Happen for the KOSPI 3000 Era to Resume?

This year, major stock indices in countries such as the United States have been reaching all-time highs. However, the KOSPI, which hit its historical peak at 3316 in June 2021, has been stagnant. Under what conditions can the KOSPI return to the 3000 level?

The KOSPI remains undervalued. Over the long term, the KOSPI has reflected nominal Gross Domestic Product (GDP) and risen beyond it. From 2000 to 2023, nominal GDP grew at an average annual rate of 5.7%, while the KOSPI increased by an average of 7.4% annually during the same period. Nominal GDP is expected to grow by 4% this year (real GDP 2.5%). In this case, the appropriate year-end KOSPI level would be around 3200.

For the KOSPI to regain its footing, the economy must first recover. Although structurally the Korean economy has entered a low-growth phase, it is currently in an expansion phase from a short-term cyclical perspective. The leading index cyclical component, which had been preceding the economy, hit a low in April 2023 and has been rising until April this year.

Exports have been increasing since the fourth quarter of last year. In particular, semiconductor exports, which have the highest export share, have surged significantly. By country, exports to the United States have maintained a strong growth trend, and exports to China have also increased this year. Domestic demand, including consumption and investment, remains relatively weak, so the pace of economic recovery will be slow, but the economy has entered an expansion phase since the fourth quarter of last year or the first quarter of this year.

The second condition for stock price increases, market liquidity, is also showing signs of improvement. The growth rate of broad money supply (M2), a representative monetary indicator, is rising. In December 2021, the M2 growth rate (year-on-year) was 13.2%, but it fell to 2.2% by June 2023. However, it has since turned to a gradual increase, reaching 4.9% in March this year.

As bank fixed deposit interest rates, which had risen to 5%, have dropped to the mid-3% range, funds are moving toward more liquid assets. Short-term idle funds are increasing. Short-term idle funds refer to highly liquid money that can move at any time to places with higher expected returns.

This includes cash currency, demand deposits, passbook savings accounts, money market funds, negotiable certificates of deposit, repurchase agreements, and securities investor deposits. Short-term idle funds, which were 1609 trillion won in December 2021, sharply declined to 1390 trillion won in January 2023. However, they have since increased, reaching 1532 trillion won in March this year.

In the fourth quarter of this year, as the consumer price inflation rate approaches the 2% range, the Bank of Korea is likely to cut the base interest rate. If that happens, funds around the stock market will increase at a faster pace.

Thirdly, if the value of the Korean won rises, the KOSPI can also increase. At the end of May, the won-dollar exchange rate was 1384.5 won, up 7.5% from the end of last year. However, considering the expanding domestic and external imbalances in the United States, the dollar value is likely to decline in the medium to long term. In 2023, the U.S. federal government debt stands at a very high level of 124.3% of GDP, with net external debt at 72.2%. This year, Korea's current account surplus is expected to exceed $60 billion, acting as a stabilizing factor for the exchange rate.

Analyzing statistics from January 2008 to May 2024, the correlation coefficient between the relative stock prices of Korea and the U.S. and the dollar index was strongly negative at -0.86. This means that when the dollar value falls, the KOSPI tends to rise relatively more than the S&P 500. Foreign investors have net purchased 17.8 trillion won worth of KOSPI stocks from January to May this year. This is likely because not only the KOSPI but also the won is considered undervalued.

The conditions for the KOSPI to regain its position are being met. Recently, investment funds disappointed with the domestic stock market have been moving to the United States. A balanced perspective is needed at this time.

This content was produced with the assistance of AI translation services.