Stock Market Shows Signs of Overheating
The stock market is showing signs of overheating even though the economy is in the doldrums, with frantic trading volume and record closes as interest on savings plunges to zero.
The Korea Composite Stock Price Index closed up 1.4 percent at 2,311.86 points on Wednesday, the first time since October 2018 that it rose above 2,300 points.
The junior Kosdaq also closed up 1.43 percent at 847.28 points, the highest in two years and two months. The KOSPI has surged 59 percent since this year's low in March while the Kosdaq has soared 98 percent.
Individual investors are powering the stock market's growth, snapping up around W430 billion worth of stocks on Wednesday, the sixth day of a bull run (US$1=W1,189).
According to the Korea Securities Depository on Wednesday, individual investors also bought around W3.83 trillion worth of stocks overseas. They bought Tesla, Amazon and other U.S. tech shares but also showed a huge appetite for Chinese stocks with a record W290 billion worth.
In the meantime investors are still buying real estate despite desperate attempts by the government to tame prices with tough regulations. Cryptocurrency values are also soaring. Bitcoin traded at around W6 million in March but is now worth W13-14 million, the highest since August last year.
Gold prices are skyrocketing as a safe-haven investment. The price of gold for December delivery on the New York Mercantile Exchange increased 1.7 percent on Tuesday to reach US$2,021 an ounce, surpassing $2,000 per ounce for the first time. Gold has surged more than 25 percent this year. Silver prices are also rising from around $11 in March to around $26.
Analysts warn that the trend is abnormal. Korea's economy shrank 3.3 percent on-year in the second quarter, the lowest growth since the first quarter of 1998 at the height of the Asian financial crisis.
But the excessive increase in asset values is attributable to excess cash in the market. Central banks around the world slashed borrowing rates, and this has also made it less attractive to park money in bank deposits.
According to the Korea Federation of Banks on Wednesday, the country's four major commercial banks are offering a paltry 0.5 percent interest on average on long-term deposits. That means putting W100 million into a bank account yields only W35,250 in monthly interest.
But liquidity alone cannot explain everything. The U.S. dollar is expected to remain weak for an extended period while ultra-low interest rates prompt investors to seek other assets.