The unchanging truth proven by centuries of financial history is that every rally must end. While the recent rise in Korea's stock market is said to be based on strong earnings by blue chips like Samsung Electronics and SK hynix, powered by the global artificial intelligence (AI) revolution, the "surge fatigue" created by a massive inflow of individual money over a short period is also at a level that cannot be ignored. In particular, because even large-cap domestic stocks have repeated sharp swings like meme stocks, the correction that can occur as a broad bull run draws to a close is bound to deliver a bigger shock.
Experts advise that as the phenomenon of even large-cap blue chips showing meme stock-like volatility becomes routine, authorities and individual investors alike should set up safety nets and respond accordingly. They note that although household money is currently driving the market higher, investors must strictly adhere to risk management principles in case sentiment reverses.
Jeong Hyeonjong, a researcher at Korea Investment & Securities Co., said, "The recent movements of the asset market and the underlying investor sentiment show characteristics typical of the late stage of a bull market." Jeong said, "As we move into the second half of this year, the liquidity expansion phase will come to an end, and the pressure to prove the sustainability of AI investment through earnings will grow," adding, "In this process, risk assets are likely to be exposed to much higher volatility than in the past."
If the nearly two-year cycle of rising risk asset prices is nearing its end, it means investors should prepare for a forthcoming shift to a bear market.
The most basic and reliable safety net emphasized by many experts is the principle of "diversification."
An equity portfolio manager at a major asset management firm said, "Since last year, as the market has sustained an unusual bull run, some individual investors say it's scarier to wait and fall into FOMO (fear of missing out) than to incur losses, but actually incurring losses is a different matter," adding, "The way to reduce both FOMO and investment losses is, in the end, to spread investments across multiple assets."
The point is to allocate assets appropriately not only to semiconductor, robotics, defense, and shipbuilding stocks that are soaring now, but also to broker-issued short-term notes or bonds with lower loss potential though not high expected returns, and to gold, a traditional safe asset. More conservative investors may also find it a good strategy to secure some cash through bank deposits.
Painful examples from the past are enough to serve as a lesson. In early 2021, when the KOSPI topped 3,000 for the first time ever as ultra-low rates and a liquidity party peaked after the COVID-19 pandemic, individual investors who jumped in late "bought the top" and suffered severe losses.
At the time, Samsung Electronics surged amid chants of "80,000 won Samsung," "90,000 won Samsung," but after hitting a peak of 96,800 won (Jan. 2021), it entered a long downturn for more than four years, leaving countless "Donghak ant" retail investors stranded at the top. There is also a possibility that the process will be replayed in which large-cap stocks that ran hot like meme stocks on earnings expectations alone collapse helplessly as liquidity is withdrawn.
A market official said, "Even then, individuals said 'this time is different' and took on debt to buy large caps, but they ultimately suffered losses after missing the timing to cut losses in the downturn," adding, "We should be careful to ensure the recent AI frenzy does not morph into the past pattern of 'don't-ask speculation.'"
Goldman Sachs, in a report released in Jul. last year titled "Revenge of the meme stocks," said, "As the share of individual investor trading activity in the market has grown, excessive speculative trading has increased," adding, "The meme stock craze led to a historic short squeeze (a phenomenon in which short sellers buy back shares en masse, pushing prices up), and while such overheating can provide short-term upside, it also increases correction risk." Goldman Sachs emphasized that "risk management" should take precedence over the pursuit of revenue.
The benefits of diversification are greater for younger investors with smaller base asset pools. Another brokerage equity investment specialist said, "The shorter your stock investing history, the longer you should set the horizon for evaluating your own performance," adding, "Investment behavior that treats stock trading like scratching a lottery ticket has a very low average revenue rate."
As more individual money flows into domestic and overseas stock markets and the tendency for large blue chips to move like meme stocks spreads, the role of authorities in strengthening investor education is also important. JPMorgan said, "In periods when asset prices are highly volatile, the level of financial literacy among individual investors determines the scale of losses," adding, "As stock investing by younger generations expands, the need for financial education grows."
☞Meme stock: A compound of "meme," meaning content that trends online, and stock. Refers to stocks whose prices surge and plunge on the back of word-of-mouth by individual investors on social media and other online spaces.