[Opinion] Looking Back on the 2020 Stock Market

Professor An Hee-jun, School of Business, Sungkyunkwan University

The year 2020 saw many changes in the stock market. The KOSPI, which hit bottom in March due to the crash caused by COVID-19, quickly recovered and closed at a historic high of 2873. This is an incredible recovery, nearly doubling from the year's lowest point. Although everyone had a difficult time due to COVID-19, at least in terms of stock investment, it was a year that provided some consolation.

The rollercoaster market caused by COVID-19 was observed in most global stock markets, but it is particularly important to note the distinctive pattern of our market. In terms of the magnitude of the stock price rebound, our market far surpasses most overseas markets. Given that the real economy remains depressed, it is intriguing to understand what drives the remarkable rebound of our stock market.

First, the expansion of liquidity due to government monetary and fiscal policies can be cited as a cause. Massive liquidity may have flowed into the stock market, boosting stock prices. Some argue that the huge amount of money released into the market was not absorbed by the real economy but flowed into investment assets, causing asset inflation.

Another factor is the composition of investors. Compared to Western advanced markets, individual investor participation in our market is very high. In terms of trading volume, the proportion of individual direct stock trading exceeds 80% in the KOSPI market, which is in stark contrast to the mid-teens percentage in the U.S. market. Academia often views individual investors as being swayed by market sentiment and exhibiting speculative tendencies rather than making rational investments based on information. Such irrational investment can separate stock prices from fundamentals and inflate bubbles. If the current market is driven by a bubble, the impact of a burst in our market?which has risen more than any overseas market?would be very significant.

On the other hand, there is a perspective that stock prices reflect the market’s rational evaluation of corporate value, meaning the rise is not a bubble but a reflection of reasonable expectations for a bright future performance. From this viewpoint, what does the KOSPI index of 2873 at the end of last year signify?

Over the past decade, the KOSPI has repeatedly moved sideways within a range around 2000. As of the end of 2019, while the S&P 500 index recorded an average annual return of 11% over the past 10 years, the KOSPI’s return was less than 3%. This was due to structural differences between the two markets.

The rise of the S&P 500 index was largely driven by so-called 'S&P 5' innovative companies such as Apple, Microsoft, Amazon, Facebook, and Google. Companies that were leading stocks 10 years ago, like Exxon, Walmart, and Shell, no longer appear in the top 10 by market capitalization last year. This phenomenon is not limited to recent times. Historically, the U.S. market has grown through continuous generational replacement of leading companies via innovation. In contrast, our market has grown centered on chaebols. While this model yielded significant results in the past, it reached its limits in the 2010s, which may explain the sideways movement of the stock index.

However, signs of structural improvement have recently begun to appear in our market. The COVID-19 crisis seems to have acted as a catalyst. Among the top 10 companies by market capitalization in 2014, companies like POSCO, Korea Electric Power Corporation, and Kia Motors have been replaced by LG Chem, Celltrion, and Kakao. Since these companies related to future innovative industries are expected to play a role similar to the S&P 5 in the U.S., the current KOSPI is by no means a bubble but reflects a rational expectation of rapid adaptation to market paradigm shifts and structural changes. The author also places more weight on this view.

Regardless of how one interprets the current market situation, increased volatility during times of transformation is inevitable. Investors need to prepare for the expected sharp increase in volatility going forward. Risk management through diversification and long-term investment is more important than speculative investments chasing high returns.