Korea’s stock market needs greater resilience

When international media examine Asian financial markets, Indonesia is often the country most frequently compared with South Korea. At first glance, the comparison can appear strained. Indonesia’s per capita gross domestic product stands at about $5,000, far below South Korea’s. Yet from a global financial perspective, the parallel is not entirely misplaced. Both countries share a common legacy as recipients of International Monetary Fund bailouts during the 1997 Asian financial crisis.

Whenever global markets are rattled by negative shocks, attention quickly turns to how these two former crisis economies respond. The implication is blunt. In 2022, Bloomberg News labeled the South Korean won as one of Asia’s most fragile currencies, grouping it with the Philippine peso and the Thai baht. Indonesia’s rupiah did not make the list.

The two markets were again placed side by side this month. On Feb. 2, Asian stock markets were jolted by what became known as the “Warsh shock.” The naming of Kevin Warsh, a former U.S. Federal Reserve Board member, as a potential candidate for Fed chair heightened concerns over his hawkish views on monetary tightening, reinforcing expectations of a stronger dollar. Investors sold gold and silver in favor of the greenback, and the resulting unease quickly spread across Asian equities.

How sharply South Korea and Indonesia would falter became a key point of focus. The Kospi plunged 5.26 percent from the previous session, a steeper decline than Indonesia’s 4.88 percent drop. By contrast, stock markets in Taiwan and Japan, often seen in South Korea as direct competitors, fell by about 1 percent. Markets in China and Hong Kong slipped by roughly 2 percent.

South Korea’s stock market is unusual for its heavy reliance on individual investors, who are estimated to account for 60 to 70 percent of market participation. Many of them favor short-term trading strategies, a tendency that amplifies price swings. As liquidity has expanded and market performance has improved in recent months, investor deposits have climbed past 100 trillion won. With ever larger sums moving swiftly in and out of stocks, volatility has become more pronounced.

Compounding the problem, heightened currency volatility has recently added to instability in the stock market. When the won weakens, investors grow concerned about exchange rate losses and often sell South Korean shares to convert their holdings into dollars. The wider the fluctuations in the won-dollar exchange rate, the more violently the Kospi and Kosdaq tend to swing.

Some individual investors see sharp declines as buying opportunities. Excessive volatility, however, makes it difficult to earn the confidence of global investors. South Korea’s total market capitalization has surpassed Germany’s, placing it 10th worldwide, yet few believe the market’s underlying strength truly justifies such a ranking.

Building resilience against external shocks requires addressing the market’s extreme concentration. Samsung Electronics and SK hynix, the two dominant semiconductor firms, account for nearly 40 percent of total market capitalization. Under such a structure, the market could unravel quickly if the artificial intelligence boom proves to be a bubble. Identifying and nurturing innovative companies across a wider range of industries has become an urgent task.

The government also has much room to act. Tax incentives that encourage long-term and diversified investment by individual investors need further development. At the same time, the role of large institutional investors, particularly the National Pension Service, must be strengthened. Funds managed under professional, long-term investment strategies can serve as a crucial stabilizing force during periods of turbulence. It is time for South Korea to improve the fundamentals of its stock market so they align with the scale it has already achieved.