Korea’s stock market is writing new history. On May 4th, the Korea Composite Stock Price Index, or KOSPI, recorded its highest figure in 62 years since it opened in 1956. The benchmark KOSPI seems to be on an upward trend after being stuck in similar levels for the past six years. We will take a closer look at why the KOSPI has been on the rise and how the index will move in the future with Lee Sun-yeob of Shinhan Investment Corp.
The KOSPI seemed like it was locked in a box for the past six years as there was no big change in the figure. That’s why it was nicknamed “boxPI”, but now we can say that it has escaped from that box. The market flow had been too steady, but now that we are seeing an upward trend, it may signify there has been a significant event in the economy. The global economy has been reliant on expansionary measures for the past six years, but these pump-priming efforts are slowly coming to an end and the economy seems to have built up some resilience leading to the upward trend. So, this is meaningful in that it may signify a positive change for the economy.
The KOSPI plummeted to the 800 range following the global economic crisis of 2008, recovering to the 1600s in 2009 and the 2000s in 2010. After hitting 2228.96 on May 2 2011, the KOSPI was unable to increase any further and remained in a box, moving up and down between 1700 to 2200. However on April 26th, the KOSPI finally hit over 2,200 closing at 2,207.84 and on May 4th, the benchmark index closed at 2,241.24, beating the previous record high set on May 2, 2011. So, what is the background behind this upward trend?
The reason behind the latest upward trend is an increase in corporate profits. Just looking at this year alone, corporate profits are expected to exceed 100 trillion won based on the KOSPI and this is a record high. We are looking at corporate performances for the first quarter and they are looking good so far. Our standards had been low due to the row with China over THAAD and the global economic slump, but domestic companies, including Samsung Electronics, did better than expected. The reason why companies performed better is because the global economy is improving. The US recently raised its interest rate and the Fed has been stopping its pump-priming measures, so we can say the US economy is on the path to recovery. Meanwhile, the Chinese economy finished restructuring and its growth rate recovered to reach 6.9 percent in the first quarter, positively influencing Korea's economy. Also, the biggest factor is that Korean exports have been growing due to the recovering global economy.
A boom in exports and the good performance of listed company have boosted the KOSPI. With the recovering global economy, exports of semiconductors, petrochemicals, vessels, and regular machinery grew sharply, allowing exports to reach 51 billion dollars in April. It was the second largest monthly export volume ever recorded. With such brisk exports, over 10% of companies that announced their first quarter performances said they did better than expected. With more companies reporting this sort of "earnings surprise," more foreign investment is flooding in.
As of the first week of May this year, foreigners were net buyers, purchasing 6.3 trillion won and pushing the main index up. As of now, foreigners account for 33% of the total market cap, which is approximately 550 trillion won. Considering that domestic profits are likely to improve and that the won is likely to show additional strength against the dollar while the US and China are both on a recovery track, foreigners are likely to continue to be net buyers. This is likely to help the KOSPI rise even further.
North Korea's nuclear test and increased tension on the Korean Peninsula led foreigners to become net sellers from April 1st through 19th as they sold 822 billion won in the KOSPI market. However, with recent domestic and international economic institutions upgrading Korea's economic growth forecast, improved corporate earnings reports, the declining won to dollar exchange rate, and other favorable signs all encouraging foreign investors to turn into net buyers again, this has strengthened the KOSPI. So, will these conditions continue?
Looking at the current situation, it seems conditions could continue to improve. Normally the stock market is the business-leading index. When the stock market reaches a peak, it signifies that the economy is improving. Looking at the economic situation now, it's in the early stages of recovery, so if the economic recovery becomes more concrete, the KOSPI will be hitting figures much higher than current levels. Looking at this year, there are forecasts that the KOSPI can go up to 2,350 points.
The Korean stock market has another factor that could lead to an upturn - the establishment of a new government. After the presidential election takes place on May 9, a new government will be organizing supplementary budgets and doing its best to revitalize the economy. Through those efforts, the Korean stock market is poised for additional upturns for a bullish run. However, there are still risks that lie ahead.
Despite these positive forecasts, there are also many uncertainties. First of all, Donald Trump's policies have been continuously changing. For example, Trump has said he wants to renegotiate the U.S.-Korea Free Trade Agreement, which could have a negative impact on the local stock market. There is also the geopolitical risk related to North Korea's nuclear weapons program, which could continuously affect the stock market in a negative way.
The KOSPI has been on an upward trend, but this could change at any time with more pressure from the Trump administration to renegotiate the U.S.-Korea Free Trade Agreement or to transfer the cost of THAAD to Korea. North Korea's nuclear issue is another cause for concern. However, as emerging markets and developed countries are all showing signs of economic improvement, we should take a wait-and-see attitude towards the current boom in Korea's stock market.