Dollar-based Kospi Has Fallen to an Attractive Level
The author is a strategist of NH Investment & Securities. He can be reached at lawrence.kim@nhqv.com. -- Ed.
Investors might want to hear that investor sentiment has already fallen to its lowest point, and that share prices are already fully reflecting fears towards economic recession and earnings deterioration. In fact, sentiment among US fund managers and businesspeople has worsened to the level seen during the 2008 financial crisis. With the won depreciating against the dollar at a rapid clip, the dollar-based Kospi looks attractive. Even based just upon its book value, the index is appealing.
Uncertainties are still lingering, however. There are concerns over the Chinese real estate market. Under the communist party’s rule, China’s real estate risks are unlikely to spread rapidly over the near term, but the country’s growth momentum appears to be weakening. While China’s Covid-19 and economic policies might turn favorable for the financial market after the 20th National Congress, this remains to be seen.
The Fed is raising the FF rate above the neutral level and at the same time it is undertaking quantitative tightening (QT). While differing views exist as to the potential extent of economic woes, no one can accurately predict the ramifications of higher interest rates on the real economy. Predictions are coming out as to where the Fed’s interest upcycle will end, but there are no longer expectations that the Fed will cut the FF rate next year. The Fed will likely believe that it has finally curbed inflation only once demand has shrunk, and large manufacturers have reduced their workforces and cut salaries. The financial market still appears to be a reverse-earnings market.
At times when investment fatigue sets in, it is advisable to invest from a long-term perspective. When the economy cripples, some companies brace for tough times ahead. In the face of inflation and labor shortages, companies are likely to opt for robots and automation.
Investor strategy: Murky ‘China Dream’
- What investors want to hear: ① The corporate and household sentiment index is showing a short-term rebound after approaching the levels seen during the financial crisis. The stock market has likely moved closer to the bottom; ② With the dollar-won rate having exceeded US$/W1,400, the dollar-based Kospi has fallen to an attractive level; ③ Hospitalizations and deaths related to Covid-19 have trended down recently; and ④ If there is any change to China’s power structure, Covid-19, economic, and foreign policies could be modified
- Inconvenient truths: ① The Fed is simultaneously raising the FF rate above the neutral level and undertaking QT. In the past, when the FF rate moved higher than the neutral level, an economic recession and stock market correction followed; ② The dollar should remain strong for now, as US-China tensions persist; ③ Under the communist party’s rule, China’s real estate risks are unlikely to spread quickly in the near term, but a long-term market slump is likely; and ④ It will likely take time before trade conditions improve. Won depreciation is to continue
- Even if 3Q22 earnings prove robust thanks to forex effects, further downward adjustments are likely for earnings estimates to reflect profit uncertainties next year. Share prices are to hit bottom when cuts to earnings forecasts come to an end before turning around
- Amidst ongoing uncertainties, it is advisable to invest from a long-term perspective. In the face of inflation and labor shortages, companies may opt for robots and automation