From Liquidity-driven Market to Earnings-driven Market
The author is a strategist at NH Investment & Securities. He can be reached at lawrence.kim@nhqv.com. -- Ed.
Urakami Kunio, a prominent analyst of Japan, believed that the stock market follows a cycle, much like the four seasons of nature. Based on his theory, we believe that the Korean stock market is now in a phase of transition from a liquidity-driven market (spring) to an earnings-driven market (summer). While interest rates are rising, we do not view the current situation as being a so-called reverse-earnings market, given the ongoing recovery of the global economy. Even amid signs of consumption recovery, in order to further overcome the coronavirus crisis, the US government and Fed, or ‘superman’, are sticking to stimulus measures that further inject liquidity into the market. Against this backdrop, we expect effects from economic growth momentum to outweigh interest rate uptrends. Furthermore, expansionary policies in the US are to bring about positive spillover effects for other economies. All in all, anticipating a brisk stock market in 2H21, we advise viewing current stock market corrections (amid uptrending interest rates) as buying opportunities.
Economy: Knowing and seeing are different
- Factors currently fueling inflation are different from those of the 2016~2017 inflation phase. While inflation is now attributable to US income and consumption growth, over 2016~2017, inflation was driven by China’s industrial restructuring
- Economic indicators (eg, inflation) are predicted to rise fast on low-base effect. Even though the market expects this, upon confirmation of the actual pace of inflation increase, a calm reaction is unlikely
Investment strategy: Recommend ‘conviction buy’ for 2H21
- The financial market is passing through a phase between a liquidity rally (liquidity + policy momentum) and a fundamental rally (liquidity + economic recovery). With liquidity expansion and global economic recovery simultaneously underway, stock market multiples could further expand
- Despite an anticipated heightening in inflation, we note that when inflation is expected to heighten, market rates tend to surge in advance and later show stagnant movement. Moreover, when export-driven economic recovery and subsequent corporate earnings improvement are confirmed, the stock market can overcome unfavorable yield trends. All in all, we recommend expanding exposure to stocks if market volatility expands due to additional yield hikes
- While US/EU-China conflicts and the ‘wealth tax’ in the US remain a threat, these negatives are more likely to emerge at end-2021 or in 2022. By sector, export and cyclical consumer stocks are to lead the stock market rise down the road.
Quant strategy: 1Q21 earnings season to bring positive surprises
- Positive earnings surprises are likely for 1Q21 earnings season
- 2Q21 earnings forecasts, meanwhile, do not look inflated
- Reasons for expecting 1Q21 earnings surprises: ① Rising ASPs and widening spreads amid economic recovery; and ② strong pent-up demand effects
- Pay attention to value stock plays offering solid earnings (IT H/W, retail, and steel)
Investment idea: Patience to be rewarded
April portfolio: Earnings (IT device/auto) → Vaccine (casino, retail, apparel, and cosmetics) → Infrastructure (hydrogen)
- Pay attention to IT home appliance, and automotive; following 1Q21 earnings season, investor attention is to shift towards 2Q21 earnings
- The outlooks for the casino, retail, apparel, and cosmetics sectors are all bright. We draw attention to the pandemic-hit sectors that are underperforming the Kospi, as we expect strong rallies for them once vaccination rates accelerate from May
- Pay attention to the hydrogen sector: Five major Korean corporate groups are all planning to invest in the hydrogen sector. Accordingly, the sector’s growth momentum should pick up on domestic investment, before strengthening further on overseas green policies. We positively view new green policies in Europe (including the ‘Fit-for-55 Package’ and the EU strategy on adaptation to climate change)
→ Preferred picks for April: SEC, SK Hynix, HMC, Hyundai Mobis, POSCO, LGE, Kangwon Land, Hotel Shilla, Shinsegae International, Novarex, KOGAS, and SK Gas