[Desk Column] If There Are Fundamentals in Politics

The term 'fundamentals' is frequently used in economics. It refers to key macroeconomic indicators such as economic growth rate, inflation rate, unemployment rate, and current account balance. In other words, these are indicators that gauge the basic strength of the economy. Companies also have fundamentals. Representative examples include business performance metrics such as sales, operating profit, and net profit. Expressions like "Company A's fundamentals are strong" or "Company B's stock price needs improved fundamentals to rise" are commonly used.

Among the indices that compare a company's fundamentals with its stock price, the most representative is the Price Earnings Ratio (PER). PER is the value obtained by dividing the stock price by the Earnings Per Share (EPS). If Company C's stock price is 5,000 won per share and it earns 1,000 won per share annually, its PER is 5. If Company D also earns 1,000 won per share but its stock price is only 2,000 won, its PER is 2. A high PER is interpreted as the stock being relatively overvalued, while a low PER is seen as undervalued. For this reason, PER is mainly used to judge whether a company's stock is cheap or expensive.

Just because companies like Company C and Company D have the same earnings does not mean they are valued equally. The reason why Company C's stock price is 2.5 times higher than Company D's is examined. Besides the size of the company's earnings, other factors such as industry growth potential, market dominance, and governance structure tend to play a larger role. Considering these points, PER is mainly used to compare companies operating similar businesses within the same industry. A high PER is not always good. Excessively high PER often indicates a 'bubble.' During past events like the dot-com bubble or the biotech craze, there were companies that repeatedly saw their stock prices soar despite years of losses. Many of these companies eventually disappeared from the market. This is why a company's fundamentals are important. If a company cannot consistently generate profits, sustained survival is impossible.

How are the fundamentals of Korean companies? According to an analysis by the corporate evaluation site CEO Score of the performance of 87 companies among the top 100 by market capitalization that announced preliminary results, last year's operating profit was 101.9442 trillion won, a sharp decline of 35.9% compared to the previous year. Compared to two years ago, it decreased by 32.1%. Last year was a year when the business environment deteriorated rapidly due to the US-China trade dispute, Japan's export restrictions, and sluggish domestic demand.

The operating profit for the first quarter of this year is also unlikely to avoid a downward trend. According to the consensus (forecast) for the first quarter operating profit of 82 listed companies in Korea, compiled by financial information provider FnGuide as of the 10th, it is 17.2458 trillion won, a 10.3% (1.9878 trillion won) decrease from the 19.2336 trillion won forecasted three months ago. The COVID-19 pandemic has put the global economy into a state of shock. Production and trade have been disrupted, especially centered on China, and tourism and consumption have sharply contracted. There are widespread forecasts that Korea's economic growth rate this year will fall short of 2%.

Expectations for stock price increases have also diminished. The KOSPI rose from a closing price of 2,175 points on the 2nd of last month to an intraday high of 2,277 points on the 20th, an increase of 102 points, but recently it has been fluctuating around 2,200 points. It is certain that the global economy and stock markets will rebound once the COVID-19 crisis ends. However, concerns about the fundamentals of the Korean economy and companies remain.

The Korean economy has entered a deep and prolonged valley of low growth, and the government and National Assembly have failed to present effective measures to overcome it. Rather, they have issued countless policies that hinder economic growth. Apart from welfare or fiscal spending aimed at short-term effects, there are no notable measures to be found. Many diagnose that Korea's version of the lost 20 years has already begun. It is said that 'politics exists for the economy.' If politics has fundamentals, it would be 'the people's livelihood,' or 'minsaeng.' Political power that does not properly take care of this cannot last long. With the general election approaching, such thoughts have become frequent.