The author is an analyst for NH Investment & Securities. He can be reached at bk@nhqv.com -- Ed.
In 2023, an inflection point for the stock market was reached reflecting the differing stances taken by the Fed and market participants. Recently, the Fed has begun looking ahead toward lowering interest rates proactively in 2024. Thanks to this attitude, the market should display downward rigidity. At this moment, however, there is also little upside potential for the market. While the market at large will likely remain stagnant, performance is forecast to vary widely by stock. We note that stocks that fare ill in one year tend to enjoy technical rebounds in the following January.
I. Economy: Fed watch
- The Fed has changed its stance from sticking to no rate decreases to signaling rate cuts for 2024. The central bank now appears to be confident toward inflation control. Given that the Fed was criticized for not responding quickly enough to runaway inflation in 2022, we expect the central bank to move more proactively this time around
- In general, the Fed’s rate cuts push up GDP growth. For instance, once mortgage rates decline following base rate cuts, new house purchases should pick up. In line, in 4Q24, US GDP growth is projected to be higher than the level (1.4%) suggested by the FOMC
II. Investment strategy: Index to remain stagnant, but performance to vary by stock
- The Kospi is to remain within the 2,450~2,650P range in Jan 2024, but performance should vary by stock given January Effect
- Even if the Fed has begun looking ahead to lowering interest rates in 2024, additional bond yield increase to be limited in light of the spread between US FF rate and 10yr US TB yield
- The stock market is deemed to have limited upside potential when it rallies on swift rate cuts alone. There is a need to confirm earnings strength in order to justify valuation burden
- The Kospi is showing a12M trailing P/E of16.2x and a 12M forward P/E of10.4x. We attribute the fact that the pace of the Kospi rally is lagging that the US market to comparatively lower corporate earnings visibility for 2024
- Although the index is to remain subdued until earnings visibility rebounds, performance is to vary by stock
- Assuming that dollar strengthening will remain limited over the short term, backed by a Fed pivot and bottoming-out of the European economy in early 2024, a technical rebound is likely in Jan 2024 for sectors or countries that have put in poor performance in 2023
III. Quant/portfolio: Steer clear of potential big baths; small/mid-caps to rally
[Korean earnings and style]
- Kospi’s 12M forward EPS is to remain on an upward trajectory, but Kospi EPS will likely affected by the magnitude of big baths (ie, large-scale loss recognitions at yearend)
- In order to steer clear of earnings shocks, we advise being wary toward heavily-indebted companies. Caution is also required for companies whose earnings have yet to be revised
- Small/mid-cap stocks are to rally in Jan 2024. We advise taking note of the impact of institutional investors’ portfolio rebalancing (window dressing) at the beginning of the year. The areas of interest for ITCs are: ① IT; ② growth stocks; and ③ materials
[Investment ideas]
- ① Semiconductor plays are to enjoy earnings improvement in 2024: Earnings for M7; additional earnings improvement need to be confirmed, earnings projections will be pushed up once semiconductor prices jump
- ② Internet, game, healthcare stocks to benefit from rate cuts
- ③ Value stocks based on seasonality, expectations for rock bottom, and impact of Chinese policy meetings
→ Promising stocks for January: SEC, SK Hynix, SEMCO, JNTC, NAVER, Yuhan, Wemade, T-Robotics, Poongsan, and DI Dongil