There is analysis that the large-scale liquidity (money) the government and the Central Bank have released into the market to boost the economy is propping up a rising stock rally. With tough regulations raising the threshold for the real estate market, surplus household funds are said to be flowing into stocks in large volumes.
According to the Bank of Korea (BOK) on the 15th, as of the third quarter of last year, Korea's broad money (M2) as a share of nominal gross domestic product (GDP) was 153.8%. That is more than double the United States (71.4%). Even though the BOK recently excluded revenue securities such as exchange-traded funds (ETF) from the M2 tally through a statistical revision, the amount of money circulating in the market relative to the real economy remains higher than in major countries.
Looking at M2 under the previous standard, which includes revenue securities such as ETFs, the rise in liquidity is even clearer. As of November last year, the old M2 was 4,498.6 trillion won, up 0.6% from the previous month and 8.4% from a year earlier. The year-over-year growth rate has stayed in the 8% range for four straight months since August last year.
Some say the abundant liquidity environment is a key pillar behind the recent stock market strength. With benchmark rates low and banks' deposit and installment savings rates down, household money seeking high returns is flowing into the stock market. In fact, as of November last year, time deposits and installment savings with maturities under two years plunged by 13 trillion won in a single month.
There is also an interpretation that tightening real estate regulations have become a catalyst for directing household funds to the stock market. As loan restrictions and perceptions of a peak have raised the entry barrier to real estate, household money with nowhere to go has chosen the relatively accessible stock market as an investment destination. A researcher who requested anonymity said, "As funds flow into stocks amid a regime of real estate regulation, an effect is appearing that supports the market's upward trend."
Still, some point out that liquidity alone cannot explain the recent stock rally. Another economist said, "As interest rates fell, the appeal of rate-based products such as deposits and installment savings likely diminished, prompting funds to move into stocks," but added, "It is hard to explain the domestic market's rise by money supply expansion alone, and given the lack of pronounced multiple expansion, it is reasonable to view the gains as earnings-based."