SVS Premium is publishing a column by Professor Kim Young-ik of Sogang University's Graduate School of Economics starting today. Professor Kim is an economist who served as the head of Daejeon Securities and Hana Securities Research Center, accurately predicted the stock price crash just before the 9/11 attacks and the subsequent rebound based on the stock price prediction model he developed, and warned of the financial crisis in 2008 and the economic crisis in 2020, making him the "Dr. Doom" of Korea and the macroeconomic mentor of our time.
This year, our stock indices have been rising faster than the world's major stock indices. For stock prices to rise further, the economy needs to recover. There are some signs of this, such as the rise in the Organization for Economic Co-operation and Development's (OECD) Leading Index of South Korea's economy in April.

According to Morgan Stanley Capital International (MSCI), global equity indices rose 8.2% (9.0% in developed markets and 2.2% in emerging markets) through April this year. During the same period, the KOSPI rose by 11.9%, exceeding the global average gain. In particular, the KOSDAQ index rose 24.1%, the highest gain among major stock indices.

The reason why our stock price has risen so much is probably because it was undervalued due to the sharp decline last year. In terms of nominal gross domestic product (GDP), the KOSPI was undervalued by about 22% at the end of last year. Another reason for the rise in stock prices can be found in the expectation of economic recovery. Comparing the share price growth rate of each KOSPI industry, the growth rate of economy-related industries such as steel, transportation equipment, and electrical and electronics was the highest at 21~22% until April this year. On the other hand, the less sensitive sectors of food and beverage (-3.1%), telecommunications (-3.5%) and electricity and gas (-24.1%) declined.


Will the economy recover as the stock market expects? Although production increased this year, mainly in the service sector, manufacturing output fell by 9.9 percent in the first quarter compared to the same period last year due to weak domestic demand and exports. However, the manufacturing economy is showing signs of coming out of the worst of the worst. The inventory/shipment ratio, which was at its highest level since the 1998 currency crisis (122.5) in January this year, has declined modestly since February, reaching 117.8 in March. This is partly due to the fact that our manufacturing industry has reduced production in order to adjust inventories, but when inventories are reduced, there is room for companies to increase production accordingly. After the fourth quarter of this year, the inventory rate is likely to be lower as shipments increase, mainly exports.

One of the most useful indicators for predicting the economy is the leading index published by the OECD or the Office for National Statistics. The OECD's Leading Index of South Korea peaked in May 2021 and declined through March this year. The KOSPI, which crossed the 3300 level in June 2021, also fell below 2200 in the second half of last year. However, the OECD Korea Leading Index showed a slight rebound in April. We'll have to watch the data for the next few months to see if it's shifting to an uptrend.


We should also pay attention to the "Industrial Activity Trends" for April, which will be released by the National Statistics Office at the end of May. The leading index cyclical fluctuations peaked in June 2021 and declined through March of this year, as whether they will rise in April will have important implications for the outlook for the economy and stock prices. Analysis of statistics from January 2000 to March 2023 shows that the OECD Korea Leading Index precedes Statistics Korea's Leading Index by one month. The correlation coefficient was also very high at 0.83. Assuming that the OECD leading index hit a low in March, it can be assumed that the leading index of the National Statistics Office also hit a low in April. In fact, some of the seven components of the leading index are sending positive signals. The KOSPI has continued its upward trend this year, and the inventory circulation indicators, short-term and long-term interest rate differentials, and economic sentiment indices are improving.


(The rest of the story is from the soup)