Retail investors should be cautious in overheated market
Korea's stock price index surpassed 3,000 points Thursday for the first time in the bourse's 38-year history. A combination of factors pushed the KOSPI into untrodden territory, such as abundant liquidity thanks to the government's massive release of fiscal funding to help overcome the impact of COVID-19; a craze among individual investors, seen as acting like “a colony of ants”; and an optimistic outlook on high-tech industries such as secondary batteries, biopharmaceuticals and electric vehicles.
However, this is the time for retail investors to listen to warnings against the market's unprecedented steep surge. It is unusual for the finance ministry and the central bank to simultaneously issue a warning on the gulf between the stock market and the real economy. Particularly, individuals should refrain from investing in the stock market with borrowed money. The government ought to fully prepare for managing risks arising from this excess liquidity.
It feels as if we were living in a different world, given the market index plunged to 1,457 points in March last year when the first viral wave hit Korea. The KOSPI has continued to soar since the beginning of 2021. Aside from overflowing liquidity, a huge amount of idle money has also been flowing into the equity market after the government's crackdown on real estate speculation amid the near-zero interest rate.
Market analysts paint a rosy picture for this year's market, too, when the country will gradually be released from the pandemic's grip. As the old saying goes, however, the higher the mountain, the deeper the valley. Outstanding loans for margin trading, a yardstick for overleveraged investments, have approached 20 trillion won ($18.4 billion). There are also more than a few hidden risks, such as snowballing household debt, a possible delay in economic recovery and the escalating U.S.-China conflict.
Korean companies' share prices have been undervalued compared with their foreign counterparts of similar size and performance due to the “Korea discount,” marked by geopolitical risks and outdated corporate governance structure. To ensure a stability on the Seoul bourse, the authorities should establish a fair market order, foster future industries through regulatory reforms and ease economic polarization.