[Financial Planning for the 100-Year Life] Will the Stock Market Rally Continue in the Second Half of the Year?

In the first half of this year, the KOSPI recorded the highest increase among major global stock indices. While the index is expected to continue rising in the second half, the rate of increase is likely to slow down.

By the end of June 2025, global stock indices (based on MSCI) had risen by 9.1% compared to the end of the previous year. During the same period, emerging market indices increased by 13.7%, outpacing developed markets, which rose by 9.1%. The KOSPI surged by 28.0% from the end of last year, more than three times the global average. The KOSDAQ also posted a 15.2% increase, exceeding the global average.

The KOSPI has been rising as its undervaluation is being corrected. Over the long term, the KOSPI has tended to follow nominal GDP growth. From 2000 to 2024, nominal GDP grew at an average annual rate of 5.9%, while the KOSPI rose slightly higher at 6.7%. Based on nominal GDP estimates, the KOSPI was undervalued by 24% last year. If nominal GDP grows by 2.9% in 2025, the fair value of the KOSPI would be around 3,263.

Since the KOSPI is still in undervalued territory, there is room for further increases. However, for the KOSPI to rise further, the economy needs to recover, and more funds need to flow into the stock market.

First, the economy is likely to recover gradually, with the first quarter of this year marking the bottom. Economic sentiment is improving. In particular, the Consumer Sentiment Index compiled and published by the Bank of Korea reached 108.7 in June, the highest level since June 2021 (100.8). The key issue is whether this improvement in consumer sentiment will translate into actual consumption growth. One of the main indicators of consumption, retail sales, increased by only 1% from January to May this year compared to the same period last year. However, household income is expected to rise due to the government's supplementary budget, which should lead to a modest increase in consumption. Exports, which had declined by 1.0% year-on-year from January to May, showed signs of recovery with a 4.3% increase in June. Considering both consumption and exports, the GDP growth rate, which was 0.0% year-on-year in the first quarter, is expected to gradually rise from the second quarter and reach the mid-1% range in the fourth quarter. This recovery trend is expected to continue into next year.

Next, for stock prices to rise, capital needs to flow into the stock market. Domestic funds are already moving into equities as bank deposit rates decline. The weighted average deposit rate at banks, which was 4.29% in November 2022, fell to 2.63% in May 2025. With consumer price inflation stabilizing around 2% and the economy growing below potential, the Bank of Korea is likely to lower the policy rate further, which would also bring deposit rates down. Reflecting this, funds for stock purchases have increased significantly. The combined amount of customer deposits and domestic equity funds surged from 116.39 trillion won at the end of last year to over 143 trillion won recently. In the first half of next year, deposit rates are expected to fall to the low 2% range, nearly matching the KOSPI dividend yield (2.0%). This could lead to even more funds flowing into the stock market.

Foreign investor inflows are also improving. From August last year to April this year, foreigners were net sellers of 36.5 trillion won in the KOSPI market. However, they turned net buyers, purchasing 1.3 trillion won in May and 2.7 trillion won in June. The exchange rate between the Korean won and the US dollar is the most influential factor for foreign investors. The exchange rate, which exceeded 1,480 won in April, has recently fallen to the 1,350 won range. Based on major variables affecting exchange rates, such as the dollar index, the value of the won was estimated to be undervalued by about 13% at the end of June. This suggests that foreigners expecting the won to appreciate are more likely to buy Korean stocks.

Taking into account the economy and stock market liquidity, the KOSPI is expected to rise further. However, the recent upward trend has been excessively steep. According to my assessment using a statistical method (the Hodrick-Prescott filter), the KOSPI at the end of June was about 14% above its trend. As this gap narrows, the index may undergo a correction, so it would be wise to monitor economic and liquidity conditions calmly and respond accordingly.

Kim Youngik, Adjunct Professor, Graduate School of Economics, Sogang University