Capital Research Institute "Economic Growth Rate Expected at 3.3% This Year... Individual Investors' Influence on the Stock Market to Expand" (Comprehensive)

Removal of COVID-19 Uncertainty Expected to Boost Private Consumption
Concerns Raised Over Unconditional Opposition to Short Selling Resumption

[Asia Economy Reporter Gong Byung-sun] The Korea Capital Market Institute projected the domestic economic growth rate at 3.3% for this year. It analyzed that positive growth is possible if consumption, which was sluggish last year, rebounds and uncertainties related to COVID-19 are resolved. It also predicted that individual investors' investment capacity will significantly expand and continue until the pandemic is over. The resumption of short selling should take place only after introducing a sophisticated market stabilization process, considering the possibility of market shocks.

On the 28th, the Korea Capital Market Institute held an online seminar titled ‘2021 Capital Market Outlook and Key Issues.’ The presenters explained the outlook and key issues in the order of ▲macroeconomics ▲capital market ▲securities industry ▲asset management industry.

Kim Jae-chil, Head of the Macroeconomic and Financial Research Division, forecasted that the domestic economic growth rate will reach 3.3% this year, assuming a recovery in private consumption. He stated, “Private consumption was significantly contracted due to strengthened social distancing,” and diagnosed, “If the uncertainty caused by COVID-19 is removed, private consumption will increase.”

He also expected that last year’s export boom would positively affect this year’s domestic economic growth rate. He said, “Last year, the export recovery centered on information and communication technology (ICT) continued,” and diagnosed, “Thanks to exports, facility investment also improved.” He added, “The global semiconductor market, which is the core of Korean manufacturing, will continue its recovery trend at last year’s level,” and said, “Growth in innovative industries and the continuous expansion of the non-face-to-face market are also expected.”

He anticipated that expansionary monetary policy would continue this year as well. He predicted, “Considering the combination of low inflation and fiscal policy, the base interest rate will be maintained this year,” and forecasted, “If the economic recovery continues as expected, the base interest rate will be raised in the middle of next year.” Regarding long-term interest rates, he said, “Due to economic recovery and supply-demand factors, they are expected to rise, but the increase will be limited because the underlying economic conditions are declining and the recovery is moderate.”

Domestic investors’ demand for stock investment is expected to continue this year. Nam Gil-nam, Head of the Capital Market Division, analyzed, “Due to the persistence of low interest rates, the preference for risky assets is likely to continue,” and said, “Currently, standby funds in the stock market are steadily increasing, and as of the 22nd, investor deposits reached about 68 trillion won.”

Accordingly, he predicted that the market influence of individual investors would expand. He said, “The monthly proportion of individual investors’ trading volume reached 78% for the first time in April last year,” and forecasted, “During the pandemic, household consumption decreased while disposable income increased, so individual investors’ investment capacity will be maintained until the pandemic is resolved.”

Regarding short selling, he emphasized the need to be cautious about unconditional opposition to its resumption. He explained, “Although the lifting of the short selling ban during the pandemic phase is expected to cause market shocks, overseas similar cases show that the market impact is limited.” He added, “However, since Europe only banned it for two months, simple comparisons are difficult,” and said, “Because there is a possibility of market shocks, a more sophisticated market stabilization process is necessary.”

Regarding the outlook for the securities industry, efficiency, innovation, and sustainable growth were identified as key themes. Lee Hyo-seop, Head of the Financial Industry Division, forecasted, “Although the number of securities industry branches has decreased, the number of employees has increased due to ICT personnel recruitment,” and predicted, “Due to digitalization, the number of branches will further decrease, and cost efficiency will be emphasized.” He also selected innovation (Novel), sustainable growth (ESG), desirable asset management culture (Wealth Management), and strengthened protection of individual investors (Soundness) as this year’s key issues for the securities industry under the keyword ‘N.E.W.S.’

In the asset management industry, lowered trust in public funds and strengthened regulation and supervision of private funds were expected to be major issues. Nam Jae-woo, Head of the Fund and Pension Division, analyzed, “Although the asset management industry overall achieved steady growth in scale, there was a substantial contraction in the public fund market,” and said, “Despite the strong stock market, there was a large net outflow of about 14 trillion won from equity funds, indicating that the expansion of direct stock investment by households acted as a negative factor.”

He continued, “Due to the Lime and Optimus incidents, the private fund market shrank significantly, necessitating improvements in governance,” and forecasted, “Currently, a task force for private fund system reform is operating mainly under the Financial Services Commission, and system reform will be promoted in a direction that strengthens investor protection based on individual participation.”