A Shift in Attention to Growth Plays in the Cards
The author is a strategist of NH Investment & Securities. He can be reached at lawrence.kim@nhqv.com. -- Ed.
Negatives abound in the stock market, including reduced GDP growth projections, galloping inflation, and the US’s monetary tightening. In January, the market plunged on excessive concerns over monetary tightening, and over February~March, commodity prices have soared owing to Russia’s invasion of Ukraine. Longer-term uncertainties also exist, including the beginning of a new Cold War era, the spread of Covid-19 in EMs, central banks’ monetary policies, and companies’ increased COGS. However, excessive concerns tend to ease over time. Having surged, asset prices should stabilize, and market yields appear to be passing their short-term peaks on a lessening of worries that central banks might attempt to curb inflation even at the cost of economic recession.
Under the circumstances, market attention should be drawn to companies boasting strong growth potential backed by high margins and solid brand power. While inflation-related plays tend to perform well during periods of high inflation, with investor focus having narrowed as of late to a laser focus on inflation stocks, a shift in attention to growth plays could easily be in the cards.
Investment strategy: What’s to change, what’s not to change
- In 2Q22, certain things are to change and certain things are to persist.
- The what’s to change list includes an easing in tail risk, stabilization of asset prices, an expansion of US labor supply, a rise in Chinese production and shipments, and a slowing in US nominal rate hikes.
- The what’s not to change list include changes in the global security paradigm, doubts over central banks’ monetary stances, light and shade from zero-emissions policies, increased corporate COGS, concerns over Covid-19 spread in EMs, worries towards agflation, and Korea’s likely biased diplomatic policy.
- Although factors stoking long-term uncertainties remain in play, we point out that tension levels tend to rise and fall according to cycles. As extreme stress is often followed by stabilization, we see the stock market gaining at a moderate pace in 2Q22 after bottoming out in 1Q22.
- Although cyclicals are basic components of a portfolio, high-margin growth stocks should create alpha as US nominal interest rates trend downward.