South Korea’s benchmark stock index has nearly doubled since President Lee Jae Myung took office, recording the highest rate of increase among major stock markets around the world.

If one were to assign credit for this surge, a significant share belongs to the Lee administration, which since its launch has moved quickly and decisively to implement policies welcomed by investors.

Of course, this is not to deny the role of external factors. The acceleration of artificial intelligence adoption worldwide has triggered a sharp increase in demand for semiconductors, dramatically improving earnings prospects for South Korean companies operating in related industries.

At the same time, the US stock market has remained relatively stable, providing a favorable external environment for risk assets globally.

Yet the most troubling aspect is that, despite soaring share prices, the real economy has failed to show corresponding improvement.

Globally, excess liquidity injected during the COVID-19 pandemic has yet to be fully withdrawn. Onto this already accommodative backdrop has been layered a powerful new narrative: AI as a transformative force capable of reshaping productivity, profits and even national competitiveness.

In such an environment, it is hardly surprising that stock prices have risen sharply across markets. The South Korean market’s rally, viewed from a distance, appears less like an isolated success story and more like a local manifestation of a broader global trend.

If global stock markets were to enter a correction phase, the domestic market would almost certainly not be immune. Indeed, given the speed and magnitude of its rise, the risk that it could suffer a correction as severe as — or even more severe than — that of its peers cannot be dismissed lightly.

Recent data from the Bank of Korea underscores this concern. According to the central bank, South Korea’s real gross domestic product contracted by 0.3 percent quarter-on-quarter in the fourth quarter of last year. This figure was half a percentage point lower than the central bank’s own forecast of 0.2 percent growth issued just two months earlier, while marking the first quarterly contraction in three quarters.

The central bank attributed the weak performance primarily to base effects following the unusually strong 1.3 percent growth recorded in the third quarter, as well as a pronounced slump in construction investment. A closer look at the data reveals a mixed picture.

Private consumption did increase by 0.3 percent from the previous quarter, and government consumption rose by 0.6 percent. But these modest gains were more than offset elsewhere. Construction investment plunged by a striking 3.9 percent, facility investment declined 1.8 percent, and exports fell 2.1 percent.

Stock prices are not policy

That gap between stock prices and economic fundamentals is, at the very least, a cause for concern. Efforts to identify and remove structural impediments long cited by investors are necessary.

The problem arises when rising stock prices themselves begin to be treated as an objective of national economic policy rather than as a byproduct of deeper economic strength.

Stock prices should not, and ultimately cannot, serve as the final destination of national economic policy. The ideal sequence runs in the opposite direction. Improvements in the real economy should lead to stronger corporate earnings. Those stronger earnings should enhance the intrinsic value of companies, attracting investment and lifting share prices.

When that sequence is reversed — when stock prices surge first, propelled by non-economic factors, policy signals, or speculative narratives — the outcome is rarely benign. In such environments, individual investors are often drawn in by fear of missing out, making aggressive investment decisions based on vague expectations rather than accurate information.

History offers no shortage of examples showing that stories built on speculation and momentum seldom end with happy endings. Against this backdrop, another piece of news has raised eyebrows.

Following remarks by the president that appeared to encourage the National Pension Service and other public pension funds to increase their exposure to domestic equities, the institutions responsible for managing these funds have moved to expand domestic stock investment and adjust relevant systems in ways that seem aimed at supporting share prices.

At a recent public event, Lee said that the NPS holdings saw profits rise by roughly 250 trillion won ($172 billion). He went on to suggest that concerns about the pension fund being depleted by a certain year had “almost completely disappeared.”

Public pension funds, including the NPS, are not discretionary pools of capital. They are obligated to make fixed payments on a predetermined schedule, regardless of economic conditions or stock market performance. Just as pension payouts cannot be increased simply because the stock market is rising, they cannot be reduced when markets fall.

This fundamental reality is why pension funds are designed to pursue relatively stable returns across economic cycles, diversifying risk rather than concentrating it. It is also why decisions about asset allocation and system design are meant to be made by individuals and bodies with independent authority, insulated from short-term political considerations and external pressure.

Seen from this perspective, the timing of the president’s remarks and the pension fund managers’ swift policy shifts is, at the very least, unsettling. South Korea has a proverb that neatly captures such situations: “When a crow flies, a pear falls.” The saying reminds us that events can occur simultaneously by coincidence — with no causal relationship — and that observers should be careful not to jump to conclusions.

One can only hope that this proverb applies here as well — that a crow simply happened to fly by at the very moment a pear fell. In matters involving financial markets, public pensions and the long-term security of livelihoods, coincidence is far preferable to design.

Yoo Choon-sik

Yoo Choon-sik worked for nearly 30 years at Reuters, including as chief Korea economics correspondent, and briefly as a business strategy consultant. The views expressed here are the writer’s own. — Ed.


khnews@heraldcorp.com