Saturday, June 6, 2020
A Macro Strategy: Global Invasion
Covid-19 Outbreak Crushing Real Economy
A Macro Strategy: Global Invasion
  • By Ted Oh
  • March 31, 2020, 22:34
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The author is an analyst of NH Investment & Securities. He can be reached at tedoh@nhqv.com. -- Ed.

 

With Covid-19 spreading, major cities and facilities are increasingly shutting down. The economic impact of the outbreak is so large that it is drawing parallels with the 1930s Great Depression. The crisis has evolved from fears over a real economic recession (caused by the pandemic), to a credit crunch (oil price collapse), and liquidity crisis (capital defection). We note that the Fed and US government’s unprecedented capital injection measures have helped to stabilize market liquidity risks. In our view, future stock market movements will hinge on developments with the credit crisis and real economic recession.

I. Investment strategy: Patterns of recovery

US stock market turns to bear market at record pace

- The Dow Jones Industrial Average has fallen more than 20% from its peak, entering bear market territory in only 19 trading days, versus the previous record of 36 trading days set in 1896

- The raging Covid-19 outbreak is crushing the real economy, leading to credit crunch and liquidity crunch woes

Patterns of recovery: Easing liquidity crisis (reflected) → stabilizing credit crunch (partly reflected) → fading economic recession fears

- In the US, fears towards a liquidity crisis have eased thanks to the Fed’s repo operation, FF rate cuts, corporate bond buying, and unlimited QE program

- Going forward, stock market movements are to react sensitively to credit crunch indicators and the spread of Covid-19 in the US; a trading buy approach is recommended

II. Investment ideas: Focus on coveted stocks, cheap & safe stocks, and promising stocks

Portfolio strategy for April: Focus on coveted stocks, cheap & safe stocks, and promising stocks

- Key phrase for April stock market is ‘response to stock market plunge’

- ① Coveted stocks: Demand for TMT stocks is to remain solid. We suggest SEC, SK Hynix, and NCSOFT, amongst others

- ② Cheap and safe stocks: Advising to take note of EV/EBITDA and financial stability indicators, we recommend SEC, Hyundai Mobis, and Kia Motors, amongst others

- ③ Promising stocks: Deserving attention are both new infrastructure investment policies in China and changes in life patterns (‘homeconomy’)

→ Preferred plays for April: SEC, SK Hynix, Hyundai Mobis, Kia Motors, NCSOFT, Kakao, Duksan Neolux, Device ENG, Vatec, and HL Science