When Will a Bottom Be Reached?
The author is a strategist of NH Investment & Securities. He can be reached at lawrence.kim@nhqv.com. -- Ed.
When will the stock market bottom out? A range of leading economic indicators and long-short yield spreads are signaling that an economic recession is imminent. In general, once the real economy slows and corporate profits decline, the stock market drops further. But, the question is whether current issues have mostly been reflected in the stock market. Both corporate and household sentiment has worsened to an extent similar to that seen during the oil crises of the 1970s.
Under such circumstances, emerging countries remain vulnerable due to their weak consumption bases. Also, the situation does not look particularly bright for Europe or China, either. Expectations are high for a bottoming out, but worries towards decoupling are also growing. Thus, companies that are largely unaffected by the global economy or have their own themes are to be favored.
Investment strategy: When will a bottom be reached?
- The US stock market tumbles 24% on average during a recession, with a bottom reached 6~7 months from the onset of the recession
- US corporate and household sentiment is at levels seen during the bottoms of past economic recessions including the 2008 financial crisis. We believe that the stock market has pre-emptively reflected fears for future economic recession. The stock market downfall should come to an end once corporate and household sentiment stabilizes
- EMs at greater risk of inflation and foreign capital defection
- The won’s depreciation against the dollar should sustain alongside Korea’s widening trade deficit. Current consensus for 2022 Kospi NP stands at W177tn. However, we estimate that 2022 Kospi NP will be lowered to W160tn, given anticipated additional downward revisions to forecasts and repeated 4Q earnings shocks. Accordingly, we expect the bourse to fluctuate within a narrow range for some time