The Korea Composite Stock Price Index (KOSPI), which indicates the overall trend of stocks, surpassed the 2,500-point mark on October 30, 2017. However, it soon dropped as the national economy fell into recession. From 2010 to 2020, KOSPI has always resided either closely above or below the 2,000 mark. On January 6, KOSPI surpassed the 3,000-point mark for the first time in history. It had been about 13 years and five months since KOSPI surpassed 2,000 points on July 25, 2007. It seems that the KOSPI 3000 era, which was only dreamt about until now, has finally arrived.

KOSPI’s surpassing of the 3,000-point mark showed a significant rise in the stock price index in the beginning of the year. The most important factor for the KOSPI surge appears to be the participation of Korean individual investors, nicknamed Donghak Ants. Donghak Ants developed by predicting and exchanging valuable information in the flood of information brought upon by the digital age. Interestingly, age statistics on Korean search engines demonstrate that individual investors in their 20s and 30s are interested in stocks, and that the proportion of new individual investors entering the stock market is significant.

Factors Propelling the Surge

The most representative factor that has led to the continuous rise of the stock index in recent years is liquidity. To alleviate the economic recession caused by COVID-19, the government distributed the emergency relief grant, and the central bank implemented a low-interest rate policy to provide an environment of close to zero interest rates. Therefore, household and corporate loans mounted, and this surge in the supply of money led to a substantial increase in liquidity. This, in turn, created an influx of money into the stock market.

Moreover, active investment is being focused in the stock market rather than in real estate. This phenomenon is occurring because of regulations on the real estate market, such as acquisition taxes and residential mortgage loans, and soaring real estate prices. Because of such restrictions, individuals with funding power are crowding into the stock market, resulting in an abnormally high stock index. Furthermore, expectations for growth in new industries such as semiconductors, secondary batteries, electric vehicles, and bio industries are increasing the stock price of Korean companies.

The progress of vaccinations has also had an impact. Vaccination began in several countries late last year and Korea is also catching up with this trend. As the stock market moves ahead of the current economy and reflects the future, expectations for economic recovery beginning with vaccinations have raised the stock index.

Finally, the Fear of Missing Out (FOMO) phenomenon is also pushing the buyout phenomenon. Individual investors who have experienced a wider asset gap without investment in stocks are belatedly participating in the market. Their reckless purchases seem to be occurring due to the apprehension about being alienated from the current upward rally.

The Future of the Stock Market

Although the rise in the stock index seems to indicate a hopeful future, controversy continues over the risks posed by the real economy's failure to support the rise in the financial market. Inactive consumption will make the stock price valuation meaningless even in business areas currently being mentioned as the spotlight in 2021. If such a tardy economic renewal is achieved in consumption, investment, and employment in contrast to the hot asset market, a sharp adjustment in stock prices could pose a major risk to the economy.

Furthermore, the current overheating of the stock market is the largest debt investment ever, with the debt-to-income ratio steepest for those in their 30s and under among all age groups. The problem is that if stock prices in the asset market suddenly fall, liquidation occurs, or young people become credit delinquents in an instant. If a multitude of individuals go bankrupt, their personal problems can soon aggregate and expand into national problems, leading to a financial crisis such as widening the gap between the rich and the poor.

Thus, individual investors cannot be merely excited about KOSPI breaking the 3,000-point mark. Households and businesses will have to understand that low interest rates, a weak dollar trend, and guarantee of liquidity cannot be sustained and consider them when making financial decisions. Moreover, it is crucial to keep in mind that stock investment itself is not a production activity. It is important to reserve surplus funds that do not have to be paid back immediately, along with paying close attention to changes in global economic patterns.

According to Professor Eo Yun Jong (Department of Economics), in a low interest rate environment like now, the macroprudential regulation─management of the financial ecosystem─and policy of the central bank are especially crucial. For example, the central bank should continuously monitor financial institutions’ management stability and the financial solidity of households and businesses. He added that the government’s aggressive fiscal policy for households and businesses directly affected by COVID-19 is currently required. Since there is a limit to the effectiveness of conventional monetary policy such as zero lower bound (ZLB), the government is already implementing unconventional monetary policies such as quantitative easing and forward guidance.

It is truly desirable for university students to start investing in the stock market in small amounts, since it is a chance to become more aware of the Korean economy, the global economy, and changes in the industry. Professor Eo advises, however, that since it is very difficult to predict short-term stock prices, the pursuit of revenue from short-term sales should be avoided. Also, he emphasizes the necessity of a surplus fund to prepare for the uncertainty of an entity’s future earnings and future interest rates.

The magic of compound interest and continuous investment can result in the accumulation of assets, but one should still be aware of one’s personal capacity and unexpected variables. The upward journey of KOSPI is continuing, and to accompany it, one should be prepared to undertake the responsibility.