Korean Stock Market: Low Risk-Adjusted Returns

A recent opinion piece by a Bloomberg Asia correspondent, which labeled the Korean stock market as unsuitable for investment, has been criticized as somewhat exaggerated. The article is seen more as a personal opinion of a journalist rather than an official Bloomberg report, and Korean financial authorities are refuting it based on the fundamentals of the domestic stock market.

Foreign institutional investors point out that even companies with strong fundamentals in the Korean market face higher required risk-adjusted returns due to significant market volatility. The Korean market, in particular, has a heavily leveraged investment structure, which further highlights risk factors. In this situation, the inconsistent policy responses of the National Pension Service are a major factor leading investors to rate the predictability of Korean market policies as low.

The National Pension Service's failure to adhere to its principle of adjusting domestic stock holdings when they exceed 15% has sparked controversy over policy consistency. This policy uncertainty is one of the main reasons Wall Street rates the predictability of Korean market policies as low. Investors may lose confidence in the market when policies are arbitrarily changed.

The 'Korea Discount' in the Korean market is fundamentally attributed to the absence of shareholder return policies and governance risks. High policy uncertainty, in particular, makes it impossible for institutional investors to accurately predict discount rates, rendering investment unfeasible by manual. This is a critical factor making it difficult to attract foreign investment.

An analysis of data from 2008 to 2015 showed that while foreign investors achieved an average return of 77%, individual investors recorded negative returns. This is attributed to individual investors' tendency to repeatedly buy at high points due to FOMO (Fear Of Missing Out), leading to losses. In contrast, institutional investors have shown relatively good returns in recent market conditions.

The basic principle of investing is to use 'money you can afford to lose,' or spare funds. If you invest with borrowed money, you are likely to be unable to withstand a market downturn and will sell at a loss. Investing with spare funds allows you to take advantage of opportunities to lower your average purchase price when stock prices fall, which is beneficial in the long term.

Investment is not merely about making money; it is based on a belief in how one wishes the future world to develop. Investing in a specific company is like contributing to that company's vision and helping to create a better world. Therefore, to harness the power of compound interest over time, it is crucial to avoid frequent trading and provide patient capital as a partner to the company. This approach can lead to success for both the company and the investor.

In the 'humanoid era,' where AI technology expands beyond offices to industrial sites, processing enormous amounts of dynamic data is essential. Specifically, processing constantly changing information like biological data in real-time requires astronomical amounts of memory. In this context, HBM (High Bandwidth Memory) acts as a high-speed highway for data processing, and enterprise SSDs are emerging as key components for industrial AI. Korea possesses unrivaled competitiveness in these high-performance memory technologies and is expected to play a crucial role in the AI era.

As global supply chains split into two, centered around the US and China, US allies are seeking alternatives to China's supply chain. Since Europe and Japan prioritize quality of life and find overtime difficult, analysis suggests that Korea is the only advanced country that can meet deadlines. Korea is evaluated as one of the few manufacturing powerhouses that can meet deadlines, even through overnight work, serving as an alternative to China.

The AI era requires a change in perspective: everyone is a 'newcomer.' Past incumbents can fall if they fail to adapt to new technological changes, while those who were previously marginalized can create new opportunities through AI. In this era, the first-mover advantage in data acquisition is crucial, and those who act first and accumulate data are likely to monopolize the market.

AI is evolving into a tool that can process everything from conception to final payment simply by human thought. This means a departure from routines that bogged down daily life, as AI can execute entire processes based on desired outcomes, thus revolutionizing productivity.

Currently, the US GDP exceeds approximately $30 trillion, while China's is around $20 trillion, widening the gap by more than double compared to 2021. However, in terms of manufacturing value-added, China still significantly surpasses the US. Slower growth is a natural phenomenon as a country's size increases, and China's enduring economic strengths should not be overlooked.

The fundamental cause of China's economic crisis is the limits of its real estate-led growth model. Housing equivalent to the next 10 years has already been constructed, and the resulting oversupply will require more than 5 years to be absorbed. With the collapse of the real estate-centric virtuous cycle, the extensive growth model focused on cement has come to an end.

In the AI era, the US holds an advantage in AI 'brains,' or software technology, but China leads in humanoid hardware, batteries, manufacturing efficiency, and vast training data. These are crucial competitive strengths when AI is applied to actual industrial sites. Therefore, the analysis suggests that industrial competition in the AI era will ultimately boil down to batteries and manufacturing.

China has a culture of relentless 24-hour development, producing 900,000 talented individuals annually and rapidly advancing technology. In contrast, countries like Korea and Europe ensure worker rights, leading to guaranteed rest periods, which creates a difference in development speed. The AI era is a speed race where even an hour's delay can mean decades of falling behind, making China's human resources and development speed significant competitive advantages.

As China's real estate economy collapses, the wealth of traditional wealthy elites is being redistributed. This has led to a decline in middle-class consumer sentiment, resulting in reduced overall consumption. In the past, the 'hongbao' culture of giving cash during holidays was prevalent, but even this tradition is now shrinking. Consumption patterns are shifting from luxury goods to health, cosmetics, and other quality-of-life improvements.