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2023 NH Macro Strategy: Opportunities Arise from Embrace of Change

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The author is a strategist of NH Investment & Securities. He can be reached at [email protected] — Ed.

With the Covid-19 pandemic retreating, people are finally returning to the streets and resuming their normal daily lives. However, through the pandemic, the economy is now experiencing brisk inflation due to massive liquidity injections and supply disruptions. Once product prices rise, elevated price levels tend to stay put even when demand declines. The Fed’s ongoing aggressive rate upcycle is designed to cool market demand, but with inflation still roaring, the overall social cost is to be elevated.

It appears that finding a happy medium has become harder. Polarization is expected to deepen not only for consumption but also for companies and countries. Key features of 2023 are to be: 1) the identification of countries that can survive rising cost burden; 2) concentration on sound companies, leaving zombie firms to die? and 3) turnarounds at companies that finally overcome operating losses. Policymakers often dub the above-mentioned process ‘normalization’.

Against this backdrop, companies capable of well navigating a complicated geopolitical landscape and surviving higher costs should be the beneficiaries of new opportunities.

Economic outlook: Season of change

– The US’s core PCE inflation should remain high until the spring of 2023, due to: 1) a likely increase in healthcare prices; and 2) the massive liquidity injection carried out two years ago. We forecast that the Fed’s terminal rate will become clear around mid-2023

– Amid slow inflation decline, real GDP should weaken, but nominal GDP should continue to expand. Global LEI is to rebound from the summer of 2023

– Inflation and interest cost levels appear to have moved up by a notch compared to the past 15-year averages, noting: 1) changing US labor market conditions; 2) modified globalization? and 3) changing energy industry situations. Inflation and interest rates are to begin stabilizing from 2H23

Investment strategy: 1+1 = 3

– In 2023, the Kospi is expected to range between 2,200p and 2,750p

– We recommend strategies that use two inflection points, which should come in: 1) 1Q23, when slowing inflation is to be reflected, and 2) 2Q23, when downturn in the real economy is to be felt

– Global leading economic indicators are expected to turn around in line with the US credit downcycle in 2023

– A tug-of-war between the Fed’s hawkish stance and weakening inflation momentum should continue in 1Q23. We advise caution when 2yr US TB yield falls following the Fed’s expected pivot in 2Q23

– In 2023, risk factors for the domestic market include the resumption of liquidity crunch in the short-term capital market and the escalation of US-China tensions

– Performance should vary by company, depending on ability to pass increased costs onto customers. Amid higher funding costs, interest should pick up for healthy firms with ample cash holdings, whereas zombie companies are likely to be yanked from the market

Quant + investment ideas: Adaptation & change

[Earnings/style forecasts] Turnaround and deep value

– The focus of stock market valuation has shifted away from multiple reduction. In particular, super large-cap stocks, which have suffered the worst yy OP decline in the last decade, are to rebound first

– With overall Kospi earnings momentum slowing, 2023 earnings are to be driven by turnaround stocks. In 2023, we advise paying attention to stocks that are likely to achieve earnings turnarounds by reflecting economic and earnings deterioration in advance. Interest in deep value stocks is to rise in expectation of solid share performances in line with a likely easing of discount rates

[2023 Investment ideas] Adaptation & change

– 1. Industry cycle change: Semicon, shipbuilding

– 2. Inflation & business cycle change: 1) Easing of discount rate burden (healthcare, Internet); and 2) Deep value: ① Firms with abundant cash, ② Firms likely to reposition following earnings deterioration

– 3. Long-term trend: 1) Continued push for carbon neutrality and second-year government policy momentum (nuclear energy, renewable energy); and 2) Rise in automation in service sector (robots)

– Preferred stocks: SEC, SK Hynix, DSME, Kakao, Celltrion, SK Biopharm, Hyundai E&C, Doosan Enerbility, CS Wind, and SBB Tech

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