Korean Stock Market Reassessment, What Are the Risk Variables?

He explained that if the Korean market is classified as a developed market, positive effects beyond mere capital inflow can be expected.

He added that when classified as an emerging market, capital outflow can intensify during global risk-off situations, and the disadvantage of companies receiving higher discount rates when raising capital can be resolved.

Former Department Head Kim Jung-nam pointed out the phenomenon of Samsung Electronics and Hynix stock price volatility spreading to the entire market, and analyzed that the inflow of leveraged ETF products further exacerbated the supply and demand concentration. This led to an increase in the volatility of these two stocks, and this volatility was reflected across the market.

He diagnosed that as a result, the positive direction of the stock market was obscured by high volatility.

With the stock market booming over the past two years, many new investors entered the market and began to question the dynamics between minority and controlling shareholders in the existing stock market. He explained that these new-minded investors are speaking out against unreasonable aspects, and their demands are actually moving the political sphere.

Former Department Head Kim Jung-nam predicted that these efforts to improve governance will be a sustainable trend regardless of regime change.

Former Department Head Kim Jung-nam explained that when overseas pension funds invest in the Korean market, they have 'limits' on the volatility of their entire portfolio. He stated that if the proportion is increased when the Korean market's volatility is too high, the portfolio volatility itself increases, making it difficult to adhere to these limits.

He also revealed that there are restrictions on Target Tracking Error, which tends to encourage a reduction in weight when stock prices rise sharply, as in the first half of the year. This means that the high volatility of the Korean market acts as a burden for foreign institutional investors.

This figure shows that companies are undervalued in the market compared to their asset values.

He explained that since this PBR is based on book value at the time of acquisition, the PBR could be even lower when calculated based on current market value. In other words, the actual asset value of companies is not being properly reflected in the market.

Former Department Head Kim Jung-nam emphasized that in this situation, demonstrating a structural increase in multiples is key to reassessing the Korean market. He stressed the need for a fundamental change in corporate valuation beyond mere stock price increases.

He acknowledged the past example of former Federal Reserve Chairman Paul Volcker taming inflation with high-interest rate policies, but argued that it is impossible to artificially and perfectly control business cycles.

He mentioned that there were times when central banks mistakenly believed they could control the economy, but these illusions were often shattered.

As political instability grows, the public expresses dissatisfaction with economic hardship, leading to movements to 'overturn' society, explained former Department Head Kim Jung-nam. He analyzed that this phenomenon has led to the rise of Trumpism or strong socialism.

This suggests that public dissatisfaction due to wealth distribution issues intensifies political polarization, and these political changes can, in turn, affect economic cycles.

However, he diagnosed that AI is currently acting as an inflationary factor rather than a deflationary one.

He explained that investments in AI technology are leading to increased costs, thus contributing to short-term inflationary pressures.

Former Department Head Kim Jung-nam stated that he has doubts about whether current Large Language Models (LLMs) alone can fully implement Artificial General Intelligence (AGI). He assessed that the AGI implementation solution is still uncertain and emphasized that a new theoretical structure is needed for true productivity improvement.

He pointed out the technical limitation that general artificial intelligence is difficult to achieve with current technology levels.

He explained that when a company transitions from the private to the public market, it will undergo stricter market scrutiny regarding its profitability and business model.

He warned that this could put pressure on the fundamentals of AI-related companies, and investors should carefully examine these risk factors.

This theory implies that prices do not merely reflect fundamentals but can also influence them.

He analyzed that if AI companies' stock prices fall, their capital raising costs increase, which in turn can lead to reduced investment. This reduced investment can damage the data infrastructure supply chain, creating a vicious cycle that hinders the growth of the entire AI industry.

He also analyzed that as natural language-based services spread, the switching costs for users to move to other services become lower, making it difficult for a specific company to maintain a monopolistic advantage.

He noted that many people thought Apple was lagging in AI investment, but it has actually shown the best performance recently.

He added that Apple is leveraging its established customer base and ecosystem to integrate AI technology, demonstrating that an unconditional leading competition does not guarantee victory.

Former Department Head Kim Jung-nam emphasized that investors who actually make money tend to have a very optimistic mindset. He believed that an optimistic attitude is more helpful for generating actual profits than a pessimistic one.

However, he advised that this optimism does not mean blind investment, and while risk factors should be sufficiently considered, bold risk-taking is necessary when there is a price advantage. He also warned that the probability of long-term success with thematic ETFs is low, urging a cautious approach.