[BODY]
In the recent hit film "Hope," policewoman Seong-ae (played by Jung Ho-yeon) screams at the sight of aliens laying waste to a village: "No matter how monstrous you are, you can't do this!" That line comes to mind when I look at the Korean stock market right now. No matter how natural it is for markets to swing, this is beyond the pale. There are no aliens in Yeouido, yet the market spectacle is as surreal as a science-fiction film.
The Kospi has plunged roughly 40% from this year's peak—all in just over a month. Sidecars and circuit breakers have been triggered almost daily. Investors grit their teeth day after day, beating their chests: "I should have sold earlier," "I never should have started." This marks only the third time the Kospi has fallen this sharply within a month or so, after the 2008 global financial crisis and the early days of the 2020 COVID-19 pandemic.
Volatility is the essence of financial markets and a fate investors must endure. Given the massive transformation that artificial intelligence (AI) represents, some degree of stock price swings is inevitable. On a granular level, anxiety over Nvidia's "circular trading," China's fierce catch-up, and worries about the profitability of AI investment have all erupted. Above all, the higher the mountain, the deeper the valley.
Even so, the Korean market has recently degenerated into an excessively speculative arena. Reuters said Korea's stock market has gone "from a trusted market to a lawless casino," and The Economist scolded Korean retail investors as "impulsive gamblers." A stock market that should be a "reservoir of innovation" and an "ecosystem of growth"—where companies raise capital and investors build wealth over the long term—now finds itself mocked as a gambling den.
Volatility in financial markets is inevitable, but the government, far from trying to reduce it, went the opposite way. The prime example is the National Pension Service. Early this year, as the market surged on the back of Samsung Electronics and SK hynix, the NPS Fund Management Committee raised the target weighting for domestic equities to as high as 19.9% and extended the grace period for rebalancing (asset readjustment). The actual domestic equity weighting subsequently climbed to nearly 25%, and in May, by applying strategic and tactical asset allocation ranges, the door was opened to hold domestic equities up to a maximum of 28.8%.
There was no shortage of concern about the NPS—responsible for citizens' retirement—changing its investment principles. Warnings emerged that if the market turned downward, the fund's management strategy could unravel and amplify the market shock. But principles were pushed aside. With local elections approaching, doubts arose over whether political considerations had come before investment principles. Trust in the independence of NPS management was also shaken. Had the NPS rebalanced by the rules in the first half, would the market have reached its peak? Even more regrettable is that had the NPS reduced its weighting by the rules, it would have had far greater capacity to serve as a market safety net—buying blue-chip stocks at lower prices in a crash like the present one.
The government stepped on the accelerator rather than the brakes as the market raced ahead. Korea's stock market has long been regarded as a high-"beta" (market sensitivity) market. Kim Yong-beom, the presidential chief of staff for policy, said, "The high volatility of recent months is not unique to Korea," but added, "When advanced markets move by around 10, in Korea it is amplified to around 20 to 30." Yet the government—which knows this trait better than anyone—launched a leveraged exchange-traded fund (ETF) concentrating investment in the two chip giants on May 27, just ahead of the local elections, in a market already heavily weighted toward those two names. At the time, Samsung Electronics and SK hynix had risen 133% and 207%, respectively, from the start of the year.
A variety of investment products can exist in a market. The question is whether sufficient review of the impact on the market and of investor protection was conducted before introducing the leveraged ETF. It is doubtful that simulations accounting for various scenarios were carried out. The government is now moving to raise the entry barriers for investors, but one cannot help lamenting that it is too little, too late.
Riding the AI tailwind that has blown since the start of the year, the Lee Jae-myung administration has pressed ahead boldly—leading large-scale investment, floating an excess-profit distribution theory, and launching the National Growth Fund. Its stock market policy was no different. The problem grew as it lost sight of principle and prudence, intoxicated by the semiconductor boom. The price for that, one suspects, is the devastated accounts of ordinary citizens.
