U.S. Likely to Announce Policies for Gradual Monetary Normalization
The author is a strategist of NH Investment & Securities. He can be reached at lawrence.kim@nhqv.com. -- Ed.
Despite the spread of the Delta variant and rising concerns over the Gamma variant, life in DMs is returning to normal thanks to high vaccination rates. While still being cautious, people in DMs are enjoying outdoor sporting events and returning to work. As a result, consumption focus is shifting to outdoor activities and services. Supply constraints should also soon be resolved in DMs. As EMs are pushing hard to increase their vaccination rates as well, decoupling could ease to some extent. Under such circumstances, however, the US is likely to announce policies for gradual monetary normalization. Compared to the US stock market, slower growth momentum could be witnessed in: 1) countries that have been benefitting from high liquidity levels; 2) countries with weak fundamentals; and 3) countries that are easily affected by shifts in US consumption patterns.
Investment strategy: How to deal with decoupling
- A key feature of the 2021 global stock market is decoupled market performances between DMs and EMs, due mainly to differences in: 1) vaccination rates; 2) export items; 3) export dependency on DMs; 4) pre-emptive monetary tightening; and 5) economic fundamentals
- As vaccination continues, the performance gap is likely to narrow by some extent, though overall differentiation should sustain. In DMs, with herd immunity nearing, production disruption should ease, and the service sector is expected to recover. The resulting Fed tapering announcement and changes in main consumption items in DMs could weaken economic momentum in export-oriented EMs
- That said, elevated corporate earnings and undemanding valuations should limit the Kospi decline
- In 2021, the Kospi is forecast to move within a limited range. Noting differentiating momentum between exports and domestic consumption (likely to sustain till end-2021), investors are recommended to pay attention to export stocks (automobile, 5G) and domestic theme/issue stocks (financials, entertainment, retail, telecom services)
Issue analysis: Policy expectations remain intact, but...
- The Biden administration’s US$4tn infrastructure and welfare policies are progressing as planned. The Senate recently passed a US$1tn infrastructure bill, which includes US$55bn in new spending. Democrats are planning to pass the remaining US$3.5tn bill without GOP support by end-December
- The Senate and House need to discuss in earnest the FY22 budget plan and debt ceiling increase on Sep 20, when Congress is scheduled to return from recess. Given that 46 Republicans have submitted an official statement that they will not vote to hike the federal borrowing limit, Democrats might pass the debt ceiling increase without GOP support through a budget reconciliation process
- That said, it would be difficult to pass both the FY22 budget plan and debt ceiling increase through the budget reconciliation process. Accordingly, Democrats are likely to try to win GOP support. In September, political noise is expected
Quant: Service-oriented value stocks to perform strongly