[Insight & Opinion] A Society That Avoids Risk and the Wildness of the Capital Market

Germany, Europe's Economic Powerhouse, Lags Behind Apple in Market Cap
Capital Markets That Embrace Risk
Drive the Growing Economic Gap Between the U.S. and Europe

Let’s take a moment to imagine the image of the word ‘Risk.’ What feelings come to mind? Most people would probably think of ‘danger,’ ‘loss,’ or ‘speculation.’ Especially for those who have invested in stocks even once and suffered significant losses, this negative image becomes even more entrenched. However, the original meaning of risk is quite different from these associations. The word risk originates from the Italian word ‘risicare,’ which means ‘to dare’ or ‘to challenge boldly.’ The etymology itself contains the meanings of ‘challenge’ and ‘choice.’ Peter Bernstein, a master of investment theory who analyzed the history of risk for humanity, wrote in his book Risk that “Risk is not fate but choice.” The word risk inherently embodies the meaning of ‘selective and proactive human action.’

Recently, analyses and media reports on the economic gap between the United States and Europe have become frequent. When the European Union (EU) was launched in 1993, many analyses suggested that a new power had emerged to counterbalance the United States. When China awakened from a long slumber under Deng Xiaoping’s ‘black cat, white cat’ doctrine, there were voices expressing concern (?) about the U.S. economic hegemony. Some experts even predicted that after the collapse of socialism, the U.S.-centered global economic order would shift to a multipolar system involving the U.S., China, and the EU. Much time has passed since then. Germany, the leader of the EU, is struggling with a recession, and China, which had been rising, is now faltering after COVID-19.

Meanwhile, the United States is leading innovation such as AI and showing an unstoppable upward trend. This reality is starkly reflected in the stock market, the thermometer of the economy. Even if you combine the entire stock markets of Europe’s big three (the United Kingdom, France, and Germany), their market capitalization is less than 20% of that of the U.S. Germany alone is even smaller than Apple’s market capitalization. There may be counterarguments that market capitalization does not tell the whole story of the economy. Let’s look at economic growth rates this time. The gap between the U.S. and Europe has widened over the past decade. The U.S. Gross Domestic Product (GDP) grew to $26.86 trillion last year, 1.6 times the $16.254 trillion in 2012. Europe’s GDP was about $15.07 trillion last year, almost the same level as $14.6501 trillion in 2012. Europe’s economy has essentially been stagnant over the past decade.

One of the analyses explaining the gap between the U.S. and Europe is the capital market issue. The U.S. has a system where investors and companies share risk through capital markets, from startups to established listed companies. Pension assets, which are responsible for citizens’ retirement, are mostly filled with risk assets such as stocks. In contrast, Europe is loan-centered rather than investment-centered. The worldview of investment and the worldview of loans are different. Loans are fundamentally about risk avoidance. The most important question is whether the money will be lost. Therefore, collateral is required, and credit status is carefully examined. Collateral and credit represent past assets. For example, they refer to assets that companies or individuals have had from the past to the present. The worldview of investment is different. Investment looks to the future. It bets on future potential. It is a system where investors and companies share risk together and create the future.

Which side is South Korea’s capital market closer to, the U.S. or Europe? It still seems closer to Europe. Unfortunately, the bank-centered, loan-centered system is stronger. Of course, it is not necessary for all systems to be capital market-based. However, the clear reality shown by the gap between Europe and the U.S. is that without unleashing the wildness of the capital market, future growth cannot be guaranteed. This is also why Japan is trying to unleash the wildness of its capital market under the name of value-up.

Unleashing the wildness of the capital market accelerates innovation. Finance must provide the capital for innovation through investment. Pensions cannot continue to be managed primarily on a principal and interest basis as they are now. South Korea must move beyond a society that avoids risk to one that encourages and manages risk. Only then will there be a future.

Lee Sang-geon, Head of Mirae Asset Investment and Pension Center