[Insight & Opinion] The Political Economy of Lee Jaemyung's 'Stock Price Surge'

A friend who owned shares in KEPCO KPS, a nuclear power plant maintenance company, became very concerned immediately after Lee Jaemyung of the Democratic Party was elected president. This was due to memories of nuclear-related stock prices plummeting under the Democratic Party government’s nuclear phase-out policy. There were also concerns that the company could be subject to the Serious Accidents Punishment Act, which was led by the Democratic Party. However, on the first trading day under the Lee Jaemyung administration, the company’s stock price held up unexpectedly well. Later, news broke that the export of Korean-style nuclear power plants had been confirmed. President Lee Jaemyung chose an 'energy mix' of nuclear and renewable energy, instead of a nuclear phase-out. Contrary to expectations, KEPCO KPS shares soared.

Just 16 days after President Lee Jaemyung’s inauguration, the KOSPI index surpassed 3,000. This was a recovery after three years and six months. Neither the US tariff hikes nor the threat of a blockade in the Strait of Hormuz could stop the rally. For 14 million individual investors, the main concerns are the causes of the rally and its sustainability.

Progressive governments place more emphasis on distribution than growth, and some people feel that stock price increases during progressive administrations are unfamiliar, as they believe rising stock prices are a result of operating profit growth. Perhaps because of this reversal, pro-government media outlets have been giving major coverage to the stock market rally under the Lee Jaemyung administration. They cite President Lee’s pledge for a KOSPI 5000 era, the Democratic Party’s moves to amend the Commercial Act to protect shareholders, the new government’s shareholder return policies, and its commitment to eradicating unfair trading as reasons for the rally. Some even claim that the new administration has overcome the ‘Korea Discount,’ which refers to the undervaluation of Korean stocks. While these interpretations have some basis, they also sound somewhat like self-fulfilling prophecies meant for publicity.

Some studies based on political economy report that stock markets have performed well in the early stages of progressive governments, both domestically and internationally. However, in the medium to long term, there is no evidence that progressive policies?such as big government, corporate regulation, and prioritizing welfare?are more favorable to the stock market than conservative, free-market policies. There are also perspectives that take a more sober view of the recent stock market rally at the start of the new administration.

The Lee Jaemyung administration has drawn up a supplementary budget of 20 trillion won, of which 13.2 trillion won will be distributed to the public as livelihood support payments. From the perspective of foreign investors in Korea, the key difference between Yoon Sukyeol and Lee Jaemyung is execution capability. The Yoon Sukyeol administration was unable to secure budgetary and legislative support, resulting in poor execution. After the declaration of martial law, it had no execution capability at all. In contrast, the Lee Jaemyung administration, with unified administrative and legislative power, is able to carry out its decisions, and has chosen to inject liquidity into the economy.

According to the rational expectations theory, economic agents, including stock investors, only begin to act when they have a rational expectation that the government both has the ability to implement its policies and will actually do so. Liquidity expansion through fiscal stimulus is favorable for stock prices. As a result, stock investments appear to have surged, especially in sectors such as artificial intelligence, where the new government has pledged to invest as much as 100 trillion won. The highlight of this surge was the appointment of Ha Jungwoo, head of Naver’s Artificial Intelligence Center, as the presidential office’s chief AI advisor, which sent Naver’s stock price soaring by 40 percentage points in just over a week.

The problem is that fiscal stimulus is only positive for stock prices until 'inflation' kicks in. The best scenario is that the liquidity injected into the market boosts the economy without triggering inflation. On the other hand, the worst-case scenario is when there is no multiplier effect, the economy remains sluggish, inflation appears, and national debt soars. The fear of 'S (stagflation: recession plus inflation)' is much more frightening than the fear of 'R (recession)'.

Exports are also a major concern. In Korea, export volume and the KOSPI index have historically shown a direct correlation. However, on June 22, the Korea International Trade Association’s Institute for International Trade and Commerce predicted that this year’s exports would decrease by 2.2 percentage points compared to last year. While there is no need to be cynical about the stock market rally at the start of the new administration, excessive optimism should also be avoided.

Heo Manseop, Professor at Gangneung-Wonju National University