Kospi Expected to Be Bullish in 1H22 and Bearish in 2H22
The author is a strategist of NH Investment & Securities. He can be reached at lawrence.kim@nhqv.com. -- Ed.
We now wish that our daily lives will finally go back to normal, imagining that soon we will be able to travel freely just like a few years ago. We also wish that countries will no longer fight over limited supply of vaccines and share them peacefully all together. We wish that the global economy will finally recover from the Covid-19 impacts and enjoy stable growth.
In 2022, some of our wishes should finally come true, with the real economy making notable improvement as delayed production activities resume and cost burdens ease. Thanks to now widely available vaccines and Covid-19 antiviral pills, a re-proliferation of Covid-19 should not hold back the global community’s return to normalcy. Strong stimulus packages at DMs are also to provide a boost to global economic growth.
However, we believe that national egoisms will continue to prevail. Countries whose economies have recovered early will likely attempt to turn back their monetary policy. This should make situations worse for EMs, which were forced to raise interest rates early to quell down soaring inflation. With political battles likely to escalate in various countries, governments are to focus on calming down growing public outcries against deepening inequality. Against this backdrop, it appears that governments will not be able to care for others next year, either.
Economic outlook: Yesterday, today, and tomorrow
- Growth: Although 2022 GDP growth in major economies will likely decline y-y, it should surpass the potential growth rate, led by the US.
- Inflation: Backed by rising wages and the Fed’s policy intentions, expected inflation in the US is forecast to maintain a 2%+α level.
- Annual trajectory: Production disrupted in 2Q21 and 3Q21 due to supply bottlenecks are to be delayed to 1H22. Due to base effects, inflation is to slow in 2H22. Both growth and inflation should be strong in 1H22 and weak in 2H22.
- Policy: Major central banks (including the Fed) are to gradually reduce monetary stimulus plans. While the size of their fiscal policies should decrease, they will likely be larger than before the pandemic.
Stock market outlook: Seesaw
- The Kospi is expected to be bullish in 1H22 and bearish in 2H22, with a target of 3,400P.
- In 1H22, global supply disruptions should ease slightly and production should resume, leading to economic improvement.
- In 2H22, the global Composite Leading Indicator (CLI) will likely peak out, raising fears of US rate hikes. If anti-capitalist arguments surge depending on the results of mid-term elections, uncertainties surrounding the stock market should mount.
- In Korea, corporate NP will likely grow at a single-digit pace. While the Kospi growth momentum is unlikely to be strong, rallies led by cyclicals are expected in light of economic recovery trends.
Quant/Investment ideas: Let’s take a trip together
- With phased measures for returning to normal in place, economies reopen, inventory restocking begin, and cyclical stocks should gain the upper hand. Despite some disputes over profit peak-outs, sales for most sectors should be higher than the average.
- The global supply chain disruptions and increased consumer demand for commodities due to Covid-19 has highlighted the importance of the old economy. Firms around the globe maintain higher-than-average sales, and they are expected to continue reporting solid sales in 2022.
- The domestic stock market, too, is to be favorable to cyclical stocks. Firms’ top-line expansions are now underway. Profit growth momentum should differ sector by sector.
- We recommend: 1) large-cap cyclicals as they have already reflected earnings peak-out concerns, and have high potential for sustained earnings improvement; and 2) sectors which have high possibility of earnings recovery in line with Korea’s return to normalcy. Meanwhile, sectors which are to see strong earnings growth in 2022F (entertainment/media, Internet) and 2021 underperformers (Bio) are set (despite their recent earnings improvement) to generate additional returns next year
- In detail, among cyclicals, we recommend semicon, automobile, and banking sectors. We believe retail and air transportation sectors deserve attention for their high earnings growth visibility. As for generation of additional returns, we recommend entertainment/media, Internet, and environment plays for their relations with longstanding market themes (metaverse and environment). In addition, the bio sector offers strong valuation merit following a steep decline this year.
- As 2022 preferred plays, we present SEC, SK Hynix, Samsung Biologics, Hyundai Motor, KBFG, Hyundai Mobis, HYBE, Korean Air, Emart, Oscotec, Insun ENT, and JC Chemical