Investment Strategy: 2H22 Keyword Is ‘Forex Rate’
The author is a strategist of NH Investment & Securities. He can be reached at lawrence.kim@nhqv.com. -- Ed.
Economic outlook: Weakening of economic momentum
- Economic outlook: Economic momentum should weaken in 2H22, as: 1) supply chains remain disrupted; 2) galloping inflation should push down real wages; and 3) the Fed is raising interest rates, tightening its monetary grip
- Inflation forecast: With a host of factors in play, including liquidity issues, bottlenecks, energy transition, and war, US CPI is projected to top 5% at yearend
- Fed: With inflation and the jobless rate both falling outside of its targets, the Fed should continue tightening. Considering the ample surplus capital at financial institutions, the Fed is likely to shrink its balance sheet by US$95bn per month, as planned. The Fed’s rate upcycle should come to an end in 1H23, once today’s blazing inflation subsides
- Possibility of improvement: First, with auto inventory-to-sales ratio sitting at historical lows, once lockdowns ease, production should resume. Second, the US Treasury Department, with its US$900bn cash balance, is likely to release some funds around July~August, prior to the mid-term election in November
Investment strategy: 2H22 keyword is ‘forex rate’
- The dollar/won rate is to be a key driver for the stock market in 2H22, and exports are to serve as the canary in the coal mine
- Fears that have been excessively reflected in 1H22 should ease somewhat, helping to claw back some of the recent stock market corrections. But, Korean and US policy rates are likely to invert from mid-3Q22. As yearend approaches, the won should depreciate against the dollar, in which case, jitters over foreign capital outflows should mount
- Korea’s export indicators serve as the canary in the coal mine. While import amount should expand in line with higher import prices, export amount is likely to come in sluggish, amid concerns over a slowdown of demand in DMs. Accordingly, the country’s trade deficit should increase
- Chaos in digital asset markets is likely to be the ‘gray rhino’. But, the uncertain digital asset market situation is unlikely to translate into systematic risk, as digital assets have little to do with traditional bank assets. We view short-term volatility expansion in the stock market stemming from increasing near-term uncertainties in the financial market as presenting a dip buying opportunity
- Turning points could include the emergence of tech innovations, the discovery of new energy sources, quick energy price normalization upon the end of war, a return to globalization, normalization of supply chains, and policy shifts by governments. Of these, the most realistic is policy shifts by governments. We expect the Chinese government’s policy shift momentum to materialize first
Investment ideas: CHANGE
- Recommended sectors for 2H22: Content, HEV/BEV, Automation/AI, Network service provider, Game, Entertainment; companies which are riding along with changes of the time or are to benefit from cyclical developments deserve attention
- ① Change in times: EVs and AI/automation are growth-engine industries, as well as technologies to reduce costs amid soaring inflation. With the HEV/EV portion of the global passenger vehicle market approaching the 10% mark, a perception is growing that the EV market has already passed the tipping point. Companies that are faring well in the EV market should enjoy valuation re-rating. Recently, firms are actively investing in automation in response to surging labor costs. A combination of robots and AI technology, which should bring about huge manufacturing innovations, is likely here to stay as a noteworthy theme
- ② Change in companies: Arrival of Korean Wave 3.0 era. The Korean content industry has expanded its global presence. In 2H22, we draw attention to: The entertainment industry, for full-fledged offline concert momentum; the content industry, for the release of new dramas on OTT platforms; and the game industry, which is moving into the US and European markets via new console games
- ③ Change in investment: Around the globe, old economy sectors have posted sound earnings on the back of low inventory levels, strong demand, and the passing on of cost increase onto ASPs. But, new investment by old economy sectors is still low compared to pre-pandemic levels. Considering likely economic momentum slowdown down the road, new investment seems unlikely to improve. Given such, we advise paying attention to sectors such as telecom that are expected to benefit from tight supply and cost reductions
→ Recommended stocks: KIA, LGE, LG Innotek, Tovis, Kakao, SPG, NCSOFT, YG Ent, Contentree JoongAng, KT