A range-bound market is expected to occur in the next 5-10 years. The global economy is not expected to be able to sustain the current recovery over the next several years. This is because that despite the unprecedented global fiscal input, the problems have not been fixed, but instead have simply been transferred from the private sector to governments.
Furthermore, according to various economists, it will take 5-10 years for global financial institutions now in trouble to return to normalcy.
In reality there exist numerous unsolved problems. For example, asset bubbles still remain, while a drastic upturn in consumption is unlikely in the near future as global savings are increasing. Furthermore, the creation of enough jobs to boost consumption looks near impossible, while investment is not expected to substantially increase in the short term due to global over-capacity, in addition to, many countries' fiscal soundness actually worsening.
More importantly, China, regarded as the next growth engine for the global economy, looks unable to meet global expectations as Chinese people can not afford considerable consumption until a social safety net, including a national pension and health insurance system, is established. In addition, China will not appreciate the yuan in order to solve the global imbalance as it knows well that Japan suffered a “lost decade” due to the yen's appreciation after the Plaza Accord in 1985. All things considered, the global economy is not likely to recover in the short term.
Based on such an outlook, numerous market watchers, including value-based analysts, are predicting a range-bound market and recommending an investment strategy, which they think is right for such a market trend. This strategy is the 'buy and best-sell strategy,' under which investors buy value stocks, rather than growth ones, at a 'low' price/PER and sell them at a 'fair' price/PER. The low and fair prices are determined after valuing companies and stocks. To add a remark, the 'low' price, regarded as the buying price, means the price with a reasonable 'margin of safety' to avoid possible risks and secure proper returns, while the 'fair' is the point of price accurately reflecting the value of a company or a stock and regarded as the selling point.
During a bull market, the buy and hold strategy may be the best as investors can make profits on a par with market performance. During a range-bound market where stock prices return to their starting point after moving up and down, however, the buy and hold strategy gives investors dividend income only--if any--because there will be no appreciation in stock prices. This is why value-based analysts recommend the buy and best-sell strategy during a range-bound market.
However, a question arises, that of “why value stocks?” Morgan Stanley in Seoul has recently recommended investing in value stocks, saying that considering the uncertainty of global exit strategies and the sovereign risks of some European countries, investors should pay attention to value stocks with robust performance over the past ten years. Indeed, when the economic outlook is uncertain and a range-bound market is expected, there is a strong possibility of zero or negative price appreciation of growth stocks. However, when regarding value stocks, investors can at least expect some dividends even if there is no appreciation in stock prices, and in the best case they can enjoy decent returns above the market performance plus some dividends.
Presently, value-based analysts in Korea are referring to various companies, including Dongsuh, Lotte Samkang, CJ, KT, KEPCO, and KT&G, as some of Korea's value stocks. When the uncertainty of the economy as well as the market is getting bigger than before, investors should pay attention to these value stocks.