“Now is the time to protect your assets, a crash you’ve never seen in your life will come”

“In the past, after wars, revolutions, and infectious diseases passed, there was a shortage of people to work, so wages rose and the income inequality was resolved. The COVID-19 pandemic has created the opposite situation. Because the economy is bad, central banks around the world, especially the central bank of the United States, have released huge amounts of money. Some media reported that the top 10% of Americans own 90% of all stocks. Instead of resolving the wealth inequality, it has deepened.”

Kim Young-ik, a professor at Sogang University’s Graduate School of Economics and former vice president of Hana Daetoo Securities (currently Hana Financial Investment), is famous for accurately predicting market crises and bubble collapse and recovery. The stock price crash and rebound just before the September 11, 2001 terrorist attacks in the United States, and the prediction of the global financial crisis in 2008 are representative examples. Called ‘Korea’s Doctor Doom’ (doom), he is attracting attention by warning of market risks, saying, “There may be a collapse that you have never seen in your life.”

Professor Young-ik Kim is famous for accurately forecasting the crisis and recovery of the asset market. [지호영 기자]

US stock market overheats at dizzying levels

What does the phrase “there may be a crash I have never seen in my life” mean?

“I see all asset prices as bubbles right now. Especially when you look at the US stock market. Global investor Jim Rogers said that ‘a crisis never seen in a lifetime could come within a year or two,’ and I am of the same opinion. However, the crisis begins in the United States, and I think the country that will receive the greatest shock is the United States. Market capitalization relative to gross domestic product (GDP) is often referred to as the Buffett Index (an indicator to measure the degree of overheating of the stock market proposed by Warren Buffett, and when it exceeds 100%, it is usually judged that the stock market is overheated). 332 as of the second quarter of this year %am. The average since 2000 was 180%, and just before the burst of the IT (information technology) bubble in 2000, it was 200%. It is said that house prices in Korea have risen a lot, but house prices in the United States have risen even more. According to data released by KB Kookmin Bank, Korea rose 67% based on all cities from the bottom in March 2009, while the US rose 97% based on the top 20 cities. The problem is that if the US asset market, which dominates the global financial market, collapses, the Korean market will inevitably be shocked.”What exactly is a ‘fall’?

“There is no soft landing when the bubble bursts. When Japan’s bubble burst in the mid-1980s, the Nikkei fell 80%. When the US tech bubble burst in 2000, the Nasdaq fell 75%. When China’s bubble burst in 2006-2007, the Shanghai Composite Index fell nearly 80%. A crash means a 70-80% drop like this. As a result, many companies could go bankrupt, and everyone who invested in them could lose everything.”What will happen to the Korean stock market?

“This year is a bit of a rebound, but I expect it to drop a lot next year. I don’t know how far the stock index will fall, but I think there will be one big drop. Personally, I’m looking at the 2200. The stock index, which had recently risen to 3300, fell to 2900 and rebounded slightly, but the problem is the trend. I don’t know the exact number, but I think the direction is bent. I too have been an economist and analyst for a long time, but the Korea Development Institute (KDI), the Bank of Korea, and the International Monetary Fund (IMF) will follow up and raise forecasts when the economy goes up. However, if it falls past the peak, it follows and continues to lower the forecast. The International Monetary Fund (IMF) lowered its October forecast. Koreans bought a lot of Samsung Electronics stocks, but when the stock price went up for a long time, securities companies continued to raise the target by expressing it as ‘100,000 electronics’. how about now When it goes up, it keeps raising the outlook, but when it goes down, it lowers the economic growth forecast and corporate earnings forecast. This is the beginning of that turning point.”

What should a person who owns Samsung Electronics do now?

“A close acquaintance bought Samsung Electronics stocks whenever they had money. What he always says is, ‘Samsung Electronics sent two of their children to study abroad. According to KB Kookmin Bank statistics, the number of apartments in Gangnam-gu, Seoul rose nine-fold from 1986 to September of this year. During the same period, the stock price index of the electrical and electronic industry rose 100 times. In the long run, Samsung Electronics’ stock price will rise.”

Will Samsung Electronics continue to maintain its global position in the future?

“I don’t know 10 years from now, but I think 5 years is no problem. The Korean business cycle is 33 months in the expansion phase and 18 months in the contraction phase. If the economy is good or bad every 51 months, if you hold it for 4-5 years, no matter how high a stock you buy, you will make a profit. You can own a stock that is good and will never go away like Samsung Electronics. However, we expect it to fall further by 5-10% in the future.”

When reducing the weight of stocks and securing cash equivalents

Professor Young-ik Kim predicts that the global growth axis will shift from the US to Asia. [GETTYIMAGES]
How should you revise your investment portfolio during this time?

“There is a bubble in all asset prices, so we need to lower our expected returns a lot now. We need to drastically reduce our share of stocks and secure cash equivalents. Of course, if you put your money in a bank now, the interest rate is around 1%, so considering the recent increase in the consumer price index of 2.6%, the real interest rate is negative, but if you own a lot of stocks, you can suffer a bigger loss.

US stock prices have risen the most in the past decade, increasing the number of people investing in US stocks. I don’t think the US will be in the next 10 years. I also tell the managers of the National Pension Service and private pension funds to reduce the portion of the US and increase investment in Asia as the global growth axis is shifting from the US to Asia.

China has very strong corporate regulations and the war for hegemony between the US and China will continue. Shares in India and Vietnam are the highest in the world this year. Although it will rise by 25-30% this year and fall a little, it is recommended to invest from a distance. Indian and Vietnamese companies should never be invested in individual companies, as securities analysts do not even analyze them. There are ETFs (exchanged exchange funds) that are listed in Korea, and small investments are possible. I am also investing in India and Vietnam ETFs looking 10 years into the future.”

Which one would you recommend more?

“We have been recommending investment in the Chinese electric vehicle market since the end of last year. Now, the world is calling for ‘zero carbon’, and internal combustion locomotives emit more than 70% of the total amount of carbon dioxide. In order to reduce carbon emissions, there is no choice but to switch to electric vehicles, and China is the fastest growing country in this field. In the United States, 8 out of 10 people, we have 5, and in China 1 or 2 people own a car. China’s economy is at a per capita income of 10,000 dollars, similar to ours in the early 1990s. The economy will continue to grow, and the number of cars will increase significantly. Of course, China’s electric vehicle sector is also likely to rise by 80% in less than a year, but there is a risk that the trend should be looked at. For EVs in China, buy ETFs rather than individual stocks. Investing is ‘the right balance of return and risk’. Last year, the KOSPI exceeded 3000, but I didn’t make a lot of money. On the contrary, it has never suffered any loss. My target rate of return is at least 5 times the bank interest. I was getting 10-12% per year, but now I have adjusted it to 5-6% too.”

The high-growth era will never come again

It is called ‘the era of low growth and low interest rates’. What does this mean?

“Interest rates include future economic growth rates. When the economic growth rate is high, the pie grows, so the company grows, and the workers who work in the company can also receive a high salary. Conversely, low economic growth means sharing a small pie. Competitive firms take a lot, and uncompetitive firms are expelled. If interest rates are low now, it means that economic growth will be lower in the future. Korea’s potential growth rate (the growth rate that can be achieved without causing inflation) has entered the 1% range from this year. Recently, the Korea Institute of Finance published data that the potential growth rate will drop to less than 1% in 10 years. When the economy deteriorates, there are fewer jobs and less wages. In an era of low growth and low interest rates, the earned income earned while working is important.”

Isn’t the era of high growth coming back to Korea?

“Not coming. Labor, capital, and productivity are the determinants of economic growth, and the total population as well as the working population are shrinking. Since companies have invested a lot, productivity must increase in order for our economy to grow. But productivity doesn’t increase overnight.”

It sounds like life is getting tougher in the future. Is it that everyone misunderstood for a moment as money was released due to the COVID-19 crisis?

“Yes. According to a survey conducted by the Bank of Korea recently, 35% of 3,200 Korean companies had an interest coverage ratio (a number that indicates how much a company spends as interest expenses from income) of less than 1. It is said that 35% of companies are unable to repay interest with the operating profit they have earned in business for one year. It means that the government is supporting it by releasing money and the banks are prolonging the repayment of the debt.”

So, what is the future of Korea?

“You have to live like Japan. Korea’s per capita income went up to $33,000 and now exceeds $30,000. Japan’s nominal GDP last year was the level it was in 1995. Roughly speaking, it means that nothing has grown in 25 years, but just think of it as writing and living this year as much as you wrote last year. In the future, it is difficult for the entire Korean industry to have dynamism, and it will be in the spotlight by some industries such as the cultural industry represented by BTS or the drama ‘Squid Game’, and future industries such as hydrogen and electric vehicles. For young people, the future looks very bleak.”

There are some people who made a profit last year with ‘debts’ and ‘young’ in the stock or real estate market. Now, should we stop expecting money in the asset market?

“Although the KOSPI rose by 31% last year, it is only once in decades that the KOSPI rises like this in one year. Many Donghak Ants must be very disappointed now, but the expected return should be lowered a lot in the future. In the long run, stock prices grow in proportion to nominal GDP. Korea’s nominal GDP potential growth rate is 3%. Since the share price growth rate is 1~2%p higher than that, the expected return on the stock market should also be lowered to 4~5%. More importantly, it should be lowered even more in the next 1-2 years. You said that US stocks are overvalued, and so are ours.”

Various economic indicators turned to decline

How do you see the real estate market?

“Real estate also has cycles. Since a house is a place to live, it is right to buy and hold it whenever you have the ability to repay the principal, but it is very dangerous to borrow money to buy a house at the same time now. From 2007 to 2010, I lived in an apartment in Yeouido, Seoul, and then the house price dropped a lot, so I was worried that I might not be able to get my money back. House prices are now too high compared to inflation. Isn’t Seoul PIR (the ratio of house price to household income) 18.5 times as of June? This means that a person with an average income has to save up to 18 years and 6 months without spending a single penny in order to buy an average house in Seoul. In 2009, the PIR was 9.

The most important factor that determines the price of a house is interest rates or loans in the short term. The most important factor when explaining house prices after 6, 12, and 24 months is the coincident index cyclical variability. In particular, the world is concerned about stagflation (recession + price increase) and deflation (falling price) next year after the current inflation (inflation) ends. All assets go up once they go up, and when they go down they keep falling for years. Now is the turning point.”

How does stagflation or deflation affect our lives?

“I see deflation more than stagflation. The problem with the Korean economy is that it has too much household debt. As of the first quarter, it is about 105% of GDP, and the household debt-to-income ratio (DSR) is 36%. If you earn 1 million won a month, you have to repay 360,000 won to a financial institution, which is very high. The US is less than 10%, and Japan is much lower than Korea. A bigger problem is that household debt is higher than household financial assets. We have 2.2 times our debt-to-financial assets, and 5-6 times that of Japan and the US. The reason Japanese people have been able to survive despite deflation for more than 20 years is because their household debt is low. Of course, just because households have a lot of debt, it does not mean that a crisis is coming, as many companies and banks went bankrupt due to debt during the 1997 Asian financial crisis. However, the higher the household debt, the lower consumption will inevitably lead to low growth.”

Is there any solution to overcome such a situation?

“The government will have to spend a lot of money to get out of that situation, and it will collect a lot of taxes from companies and wealthy people who make a lot of money. A country can only survive if it becomes a society where the rich share a lot. A 2016 global consulting firm McKinsey published a report titled ‘Generation of Children Poorer Than Parents’. A survey of major developed countries shows that the country’s GDP has definitely increased during the survey period, but the children’s generation is worse off than their parents’ generation. When the top 10% take a large share of GDP and invest the remaining money in the financial market after spending a lot, asset prices rise and the rich become richer. Ordinary people have no choice but to lower their expected returns a lot while adapting to an era of 1-2% growth.”

*You can find various investment information by searching for ‘Two Bengers’ on the portal and following the post.

Reporter Lee Han-kyung [email protected]

Weekly Donga Published in No. 1312>

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