Is Korea underperformers' market?
By Daniel Cho
As of January 2013, optimism and conservatism co-exist in the stock market. On the one hand, arguments for raising exposure to risky assets are being frequently reported in the media. On the other hand, distrust in the global economic recovery appears to be somewhat strong. It is more of strong conflicts of opinions than the co-existence of optimism and conservatism.
I am very optimistic for the 2013 assets market, especially stocks. I believe the stock market will trend up, not only in 2013 but also in 2014. I would like investors to invest in risky assets.
To put it in a slightly different way, I expect financial markets starting from 2013 to be an “underperforms’ market” where assets that have so far underperformed will rally. Since the global financial crisis broke out in September 2008 with Lehman Brothers’ bankruptcy, individual asset classes have exhibited quite different returns during the past couple of years.
At a regional level, investors need to examine the economies of the U.S., Europe, and China. The U.S. economy is making a gradual recovery, overcoming a number of doubts. Its retail sales have been increasing since hitting bottom in the first half of 2009, and its housing market has also been recovering since 2011 in terms of prices and transaction volume. Employment, which is measured by the total number of jobs, has also been recuperating since 2010.
Unlike the U.S. economy, European and Chinese economies belatedly displayed rapid downturns. Particularly, during the last year, the eurozone suffered an economic recession, and the Chinese economy quickly slowed. At a regional level, Europe and China underperformed and are predicted to make recoveries starting this year.
Since the global financial crisis, a market preference for safe assets has persisted. It was the Japanese yen that probably received the biggest premium as a result. In contrast, the Korean won has received a big discount. Now both the premium and discount are decreasing, although they still have some room to fall back to the pre-global financial crisis level. Going forward, the won will get stronger, while the yen will get weaker. The won has been an underperformer for the past few years.
Bonds have been bullish for the past few years. It means that interest rates have been on the decline during those years. Stocks have underperformed bonds. Going forward, stocks will become the winner. Among stocks, bonds, commodities, and cash, it is stocks that are predicted to display the highest returns over the next two years. As regards to commodities, the U.S. dollar is not predicted to be as weak as in the past because Europe and Japan are also implementing quantitative easing, thereby affecting the dollar’s value, and the Democratic Party is in the White House.
Within the stock market, cyclical sectors such as materials (steel and petrochemicals) and industrials (shipbuilding, construction, marine transportation, and machinery), and financials (securities and banking) performed very poorly during the past year and half. These sectors tend to be significantly influenced by Europe and China. Starting from the second half of this year, these sectors, which have so far been underperformers, will prevail. In contrast, defense sectors, and information technology and automobiles (consumer discretionary sectors with strong earnings improvement potential) are feared to fare poorly.
As expectations for and signs of economic recovery strengthen, the underperformers of the past will shine. But it will take time before the expectations grow strong. It will be hard to find concrete evidence favorable for these underperformers at least until the first half of this year. The European economy is still contracting and the distrust in a sustained increase in China’s economic growth is strong. Many still believe in the growth of the bond market, or interest rate decline, has not ended yet and the depreciation of the yen driven by the recent policy measures will be short lived. Furthermore, few are predicting materials, industrials, and financials, which have long industry cycles, to emerge as stock market leaders. Investors have to raise the exposure to those assets that have underperformed solely based on the slowed weakening of macroeconomic momentum, when there is no concrete evidence. It will not be an easy investment decision but investors who are more optimistic will make more profit.