KOSPI Stock Expected Returns/Risks

KOSPI STOCK EXPECTED RETURNS/RISKS
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KOSPI Stock Expected Returns/Risks
Part 1
The KOSPI or the Korea Composite Stock Price Index is a capitalization-weighted index comprising of all common stocks traded on the Korea Stock Exchange or the stock market division. The annual returns of the KOSPI stock index over the last 10 years (2013-2022) in percentage are shown in the table below.
Year

Annual Returns (%)

2013

0.72%

2014

-4.76%

2015

2.39%

2016

3.32%

2017

21.76%

2018

-17.28%

2019

7.67%

2020

30.75%

2021

3.63%

2022

-24.89%

(Yahoo, 2023)
The average annual return over the last 10 years (2013-2022) in 2.33%.
The MSCI World Index is a broad global equity index that represents both large and mid-cap equity performances in 23 market developed countries across the Americas, Europe, Middle East, and Pacific. The annual returns of the MSCI World Index over the last 10 years (2013-2022) in percentage are shown in the table below.
Year

Annual Returns ((%))

2013

27.37%

2014

5.50%

2015

-0.32%

2016

8.15%

2017

23.07%

2018

-8.20%

2019

28.40%

2020

16.50%

2021

22.35%

2022

-17.73%

(MSCI, 2022)
The average annual return over the last 10 years (2013-2022) in percentage is 10.51%.
The average annual return of the MSCI World Index is considerably higher than that of the KOSPI (10.51% vs. 2.33%).
The average volatility of KOSPI over the period 2013-2022 in percentage is 0.52% while that for the MSCI World Index is 0.50%. The correlation coefficient between the returns of the stock price index in percentage is 0.7204. This means that the two indexes have a strong positive correlation (KOSPI’s annual returns are parallel with those of the MSCI World Index). Investing in KOSPI does not offer potential diversification benefits. KOSPI offers significantly lower annual returns compared to the MSCI World Index (2.33% versus 10.51%) and is also relatively more volatile (0.52% versus 0.50%).
These findings support the study by Bekaert et al. (2016), which postulated that each country poses a unique political risk to international investments. KOSPI’s lower annual return and higher annual volatility may be an indication of South Korea’s higher local economic and political risk when compared to the MSCI World Index. The latter is a broad global equity index and the economic and political risk of the 27 market-developed countries is likely to be markedly lower than that of South Korea.
Part 2
The expected annual return on the $100 million investment is averagely 2.33%. The risks of investing in the Korean Stock Market relate to the country’s post-pandemic economic challenges. The country also relies heavily on imports and the geopolitical tensions with its neighbor, North Korea. Furthermore, Korean stocks have a low propensity for shareholder returns (Park, 2023). The relationship between a country’s GDP and stock market performance is parallel: the higher the GDP, the higher the stock market performance. However, investors are recommended to buy shares when GDP is performing poorly and sell when the GDP is doing well. South Korea’s GDP is slowing down and therefore the investor may choose to buy now and sell when the country’s economy recovers. South Korea has not experienced any financial crisis in the last two decades with the most recent major economic slump being the 1997-1998 Asian Financial crisis. However, there are fears among economic experts and investors that the country is on the edge of an economic crisis although the fundamentals are very dissimilar from those during the 1997 Asian Financial crisis (Na, 2022).
There are several indications that point to economic stress. For instance, the country’s foreign exchange reserves have plummeted by the biggest margin since the 2008 world financial crisis (Lee, 2023). Furthermore, the country’s currency has tumbled to a decade low against the US dollar thereby resulting in large trade deficits even as interest rates continue to increase. South Korea’s economy is likely to stagnate owing to lower growth rates than earlier projected. For instance, the country’s annual GDP growth slowed to a pace of 2.6% in 2022 compared to the previous year when it posted a GD...