ⓒ YONHAP News

The benchmark Korea Composite Stock Price Index or KOSPI continues its bullish run. Many analysts had predicted that it would follow a W-shaped recovery path that shows ups and downs for a certain period. Contrary to prior expectations, however, the Korean stock market has seen a V-shaped rebound.

On August 11, the KOSPI crossed the two-thousand-400-point mark for the first time since June 2018. Having already marked a yearly high, the index seems to be moving toward an all-time high. Here is Lee In-chul, director of the Real Good Economic Institute, to examine the bullish performance of the local bourse.

The Korean stock market is on a continuous uptrend. On August 13, the nation’s main bourse KOSPI added five points from the previous session to close at two-thousand-437, hitting a two-year high. It represents a 66-percent increase from mid-March, when the index plummeted to a yearly low of one-thousand-457 amid fears of the COVID-19 outbreak. On the same day, the secondary KOSDAQ also rose nine-point-17 points to close at 854. The rise in the local stock market was influenced by an overnight Wall Street rally. U.S. stocks ended higher, with three major indexes all reporting gains. In Korea, individual investors’ net stock purchases drove up the indexes.

While stock markets in European countries, including Germany, have still been on a downward trend, those in Korea, the U.S. and China have all shown an upturn. This is a major shift from a drastic decline in share prices in March, when the markets experienced high volatility in the aftermath of the COVID-19 outbreak.

Abundant liquidity led the stock rally. Governments have expanded fiscal spending and released a huge amount of money in order to cushion the economic impact of the pandemic. The U.S. Federal Reserve has supplied a massive amount of dollars, while the Bank of Korea has cut the benchmark interest rate to the zero percent range for the first time.

Major global stock markets are showing an upward tendency, as ample liquidity released by governments has flowed into financial markets. The tech-heavy Nasdaq Composite Index has broken above the eleven-thousand-point level for the first time since the market opened in 1971. As of August 4, China’s stock market experienced the sharpest increase to have double-digit gains, compared to those in Korea, the U.S. and Japan. Korea came in second, with its main bourse rising three-point-seven percent from early this year. The Dow Jones industrial average in the U.S. increased two-point-three percent, while Japan’s Nikkei index fell four-point-six percent.

It is notable that the Korean stock market rose even higher than that of the U.S. Much of the credit should go to small individual investors known as the “Donghak ants.” Individual investors in Korea are often described as “ants” for their insignificant role in the market. The term “Donghak ants” was coined during the spread of COVID-19 early this year. Compared to the 1894 Donghak uprising led by Korean peasants who attempted to fend off foreign influences, individual investors in Korea upheld the market rally by raking in local stocks sold by institutions and foreigners. As a result, individual investors’ stock buying hit a new daily record and their deposits at brokerages have reached an all-time high. They have also posted record-high net purchases.

Individual investors have played a crucial role in driving the bullish run in the local stock market, as they absorbed shares dumped by foreign investors. Individual investors net purchased nearly 40 trillion won worth of local stocks in the first half of the year, while foreigners sold 26 trillion won worth of stocks during the same period.

The so-called “Donghak ants” movement has mostly been led by young investors in their 20s and 30s. They probably turned their eyes to stock investment, which does not require as much money as real estate. This trend continues in the second half of the year, as they bought a net three-point-eight trillion won worth of shares in July alone. The daily trading volume of the main KOSPI, secondary KOSDAQ and tertiary KONEX has surpassed 20 trillion won. Small individual investors have expanded their presence in the Korean stock market, where the role of foreigners is diminishing gradually.

The recent KOSPI rally has been led by the so-called BBIG stocks. BBIG is an acronym for the biotechnology, battery, Internet and gaming industries. Those stocks have attracted more attention than others, with the spread of COVID-19 calling attention to the value of health, non-contact and the environment. According to the Korea Exchange, the top ten stocks that saw their market cap increase in the first half of the year were mostly BBIG firms. It seems COVID-19 is accelerating the process of overhauling the industrial structure.

The phenomenon is not new. Before the Asian financial crisis in the late 1990s, the Korea Electric Power Corporation maintained its position atop the KOSPI. But afterwards, Samsung Electronics became a representative Korean company to make inroads into the global market. Around the 2008 global financial crisis, governments around the world made investment in social overhead capital to overcome the crisis. As a result, the automobiles, chemistry and oil refining emerged as promising industries. At the time, South Korean automaker Hyundai Motor grew fast.

Amid the prolonged COVID-19 pandemic, BBIG is rising as powerful stocks in Korea, threatening the existing market leaders such as semiconductors and automobiles.

BBIG7 refers to seven large-cap stocks, such as Samsung Biologics, Celltrion, LG Chem, Samsung SDI, Naver, Kakao and NCSoft. This year, their share prices have soared more than 80 percent as the biggest beneficiaries of the spread of non-face-to-face culture. Analysts predict that those stocks will lead the market rally until the COVID-19 pandemic ends.

There are mixed projections of the future KOSPI performance. Some say there is still room for a further rise, as there is plenty of liquidity in the market. Others predict that such a sharp upsurge in a short period of time will inevitably require a short-term market correction. Major factors include a possible second wave of COVID-19 cases, the result of the U.S. presidential election and an extension of the temporary short-selling ban on the South Korean bourse.

To ease the asset bubble, central banks in countries including the U.S. should end unlimited quantitative easing. But this is unlikely, considering the current economic condition in the U.S. Still, we cannot rule out the possibility that the bubble may collapse, as there are concerns over a double-dip recession in the U.S. While increased liquidity upholds stock markets, very few analysts are optimistic about the economy’s long-term prospects. 

Investors need to figure out which stocks will survive in the evolving economic environment in the post-COVID-19 era. If the stock market maintains its upward momentum, it should be okay. But if a stock market correction starts, individual investors, especially those who borrowed money for stock investment, may suffer losses. 

Individual investors in Korea are feared to take a hit, depending on how the KOSPI performs down the road. Individuals are advised to come up with smart investment strategies, while the government and institutions need to prepare for some safety measures.