Waiting for Reversal of Misery Index
The author is a strategist of NH Investment & Securities. He can be reached at lawrence.kim@nhqv.com. -- Ed.
Economic outlook: Faced with all-too-familiar difficulties
- Economy:
1) The OECD’s economic leading indicators for major countries have been on the decline after peaking in 2Q21, sinking below baseline (100). On average, the decline has been underway for one and a half to two and a half years;
2) Economic recession is 36% likely to occur within one year based on the 10yr-2yr bond yield spread. In the recent past, when this likelihood hovered around 40% or above, an actual recession has always arrived within one year. Given such, an economic recession looks likely around early or mid-2023;
3) according to the Federal Reserve of Atlanta’s predictions, an economic recession likely already began in 1Q22
Investment strategy: Waiting for reversal of Misery Index
- The prices of major assets have been reflecting both stagflation and recession concerns. The Misery Index is nearing levels seen during the late-1970s
- Pre-conditions for a Misery Index reversal include: 1) stabilizing inflation and market interest rates on a ceasefire between Russia and Ukraine; and 2) improving global consumption sentiment on the materialization of China’s stimulus economic policy
- Korea is greater exposed to rate hike risks, given: 1) a widely anticipated big step rate hike by the BOK; and 2) a likely decline in Korea’s exports going forward
- The investment clock is now pointing to fear and bull capitulation. Given that a decline in the earnings revision cycle has yet to be witnessed in earnest, we view that the investment clock is moving from ‘loser’ to ‘value’. We expect a shift from downtrend to alternating rebounds and declines. Buying momentum looks likely when a shift in policies or a slowdown in the real economy is confirmed
Investment ideas: Every cloud has a silver lining
- July portfolio: Despite the rocky macroeconomic environment, noteworthy themes exist
1) Monitoring analysts’ change of view and earnings momentum: Despite protracted strong inflation, no significant adjustment has been made in S&P500 profit estimates for 2H22. It is worth monitoring if analysts will change their view down the road. Turning to the Kospi, OP growth is slowing, but OP growth rates in the auto/parts, media, Internet, and game sectors are likely to outpace the market average in 2H22
2) Oversold stocks: A dead cat bounce is likely given that the Kospi has fallen sharply from its highs, with P/E slipping to around 8.7x. The Kosdaq has corrected more than the Kospi, and small/mid caps have retreated more than large caps
→ Recommended plays for July: Kia Motors, Kakao, LG Electronics, KT, NCSOFT, LG Innotek, Pan Ocean, Studio Dragon, E&D, and Tovis