[KOSPI Level-Up ③-2] Achieving the Dream Figure Depends on Three Key Factors

Editor's Note
With the presidential election in June approaching, the topic of "KOSPI Level-Up" has once again become a hot issue. Following Democratic Party candidate Lee Jaemyung's prediction of a KOSPI 5000 era, People Power Party candidate Kim Moonsu has also pledged to break out of the so-called "Boxpi" (boxed-in KOSPI) range. Both candidates are calling for measures to boost the stock market and agree broadly that resolving the "Korea Discount" (the undervaluation of the Korean stock market) through improvements in corporate governance is a top priority. However, their approaches differ in detail. Based on a survey and interviews with 20 domestic and international capital market experts, Asia Economy will run a three-part series to diagnose the current status and challenges of the Korean stock market, explore what policies the next administration should pursue to shed the Korea Discount label, and identify the key variables and obstacles that will determine whether the dream figure of 5000 can be achieved.

[KOSPI Level-Up ①] The 5000 Era: Dream or Reality?-Diagnosis by 20 Experts

[KOSPI Level-Up ②] "The New Government Must Do This"-Policy Proposals to Boost Stock Prices

[KOSPI Level-Up ③-1] "A Strong Commitment to Value-Up Like Japan Is Needed... Clear Incentives and Penalties Are Essential"

[KOSPI Level-Up ③-2] Achieving the Dream Figure Depends on Three Key Factors

Institutional reform alone is not a cure-all. For the Korean stock market to level up, policies that can resolve the chronic "Korea Discount" must be implemented, and three key factors must align. First, both domestic and global economic conditions must be favorable, and the industrial cycle, especially in semiconductors, must provide support. It is also crucial to ensure policy consistency and execution throughout the administration's term so that the momentum of newly introduced policies is not lost.

In a recent survey and interviews conducted by Asia Economy, most capital market experts identified "economic conditions" as the most critical variable for achieving the KOSPI 5000 era. According to the Buffett Indicator, which measures the ratio of market capitalization to gross domestic product (GDP), the Korean stock market is currently at an appropriate level. In other words, economic growth is a prerequisite for a KOSPI level-up.

The main concern is deflationary pressure surrounding the Korean economy. With consumer sentiment weakening and the real estate market slumping, domestic demand continues to stagnate, and inflation has rapidly slowed since the second half of last year. Some forecasts even suggest that economic growth could remain at 0% this year. Moreover, as an export-driven economy, Korea is highly susceptible to external shocks. There are growing concerns that the tariff shock from the United States and the slowdown in the Chinese economy could directly hit Korea's economy and stock market. Park Heechan, Head of Research at Mirae Asset Securities, stated, "It is essential to avoid falling into deflation. Deflation risk must be addressed," emphasizing, "Achieving KOSPI 5000 is not merely a stock market issue but must be approached as a problem affecting the entire national economy."

The recovery of the semiconductor industry is also considered a core condition for the KOSPI level-up. Since most of the top market capitalization companies in the KOSPI are centered around semiconductors, the structure and supply-demand of the stock market, as well as its contribution to economic growth, are closely linked. Samsung Electronics and SK Hynix alone account for about 25% of the KOSPI's total market capitalization. Cho Suhong, Head of Research at NH Investment & Securities, said, "A global industrial environment that revives export conditions centered on semiconductors must be established for the KOSPI to level up." An investment partner at a foreign investment firm also commented, "Foreign investors often decide to enter or exit the Korean market based on IT and semiconductor cycles."

The final factor is a sustained and consistent policy commitment. Trust in policy is a key determinant of investor sentiment. If policy direction changes mid-course or becomes inconsistent, investors perceive this as a risk and may withdraw. In particular, since the KOSPI level-up hinges on "structural improvement" through resolving the Korea Discount, an even stronger policy commitment is required. The successful value-up case of the Japanese stock market is often cited as a prime example of how important consistency and sustainability in policy are.

A senior official at the financial authorities stated, "Korea has already raised the issues of corporate governance reform and value-up. Regardless of which party is in power, the drive will continue, though specific policies may differ," emphasizing, "The key is maintaining a consistent and sustained drive after the reforms."

In the optimistic scenario, a U.S. interest rate cut cycle, a boom in semiconductor-driven exports, inclusion in the MSCI Developed Markets Index, and continued policy support could all combine to make a KOSPI level-up possible. On the other hand, if deflation risk, a downturn in the semiconductor industry, and geopolitical risks such as U.S.-China tensions persist, and if policy consistency falters, it will be difficult for Korea to escape the Korea Discount.

The majority of capital market experts pointed to Japan, whose value-up program served as a model for Korea, as offering key lessons. Japan has steadily pursued policies aimed at improving corporate governance and capital efficiency, and since 2023, foreign capital has flowed in in earnest, pushing the Nikkei Index to its highest level in about 35 years last year. Behind this success were unwavering policy direction despite changes in administration or weak market response, a combination of incentives and penalties that brought about tangible changes in the market, and strong and systematic policy commitment.

Lee Hyoseop, Senior Research Fellow at the Korea Capital Market Institute, wrote in his report "Performance Drivers and Implications of Japan's Capital Market Reform," "The success of Japan's capital market reform is attributable to the long-term and consistent implementation of various institutional measures." He added, "Since the end of 2012, the Japanese government has consistently pursued Abenomics policies, including accommodative monetary policy, expansionary fiscal policy, and structural reform." He further noted, "Favorable macroeconomic conditions, such as the weak yen effect, large-scale inflows of capital from China, and the Bank of Japan's large-scale asset purchase policy, were also major factors in the success of Japan's capital market reform."