Investing in 2022

view original post

By Peter S. Kim

As the world excitedly anticipates the return to everyday life for the New Year, financial markets, on the other hand, are facing an uncertain outlook. Since the pandemic outbreak almost two years ago, most investment assets have benefited from globally coordinated stimulus on both the monetary and fiscal fronts. It stands to reason that as the world returns to normal, this stimulus should also return to pre-COVID levels.

However, the policy normalization is likely to lag far behind as populist leaders are caught in a stimulus bind where any retraction will be met with political backlash. While the stimulus response to the pandemic was globally coordinated, the reversal of this stimulus will be much less so, making the year 2022 complicated and treacherous for central banks and investors.

As central bankers led by Chairman Jerome Powell agonize over the timing and manner of stimulus withdrawal, I conclude that central bankers will err on the safe side and delay tapering and rate hikes as long as possible. The diminishing independence of central banks leaves even more room for the US Fed and other central banks to continue its “data-driven” approach toward a rate strategy.

The prediction for dovish central banks does not mean there will not be any bumps along the way. The unconventional nature of this round of inflation calls for a similarly unorthodox policy remedy. Investors should recall the decade-long period it took the U.S. Fed to unwind monetary stimulus from the subprime mortgage crisis of 2009. The inflationary pressures in this pandemic are primarily from the trade war, supply chain disruptions, and tight production capacity rather than ultra-low interest rates.

The de-globalization already the course was accelerated by the global pandemic causing inflationary spurts. Adding to the cost-push inflation is the withdrawal of China from the global supply chain after decades of assuming the role of “factory to the world.” China’s clampdown on its national champions for the sake of the “common prosperity” campaign adds to the complexity for investors in Asia.

For the coming year, China’s policy direction on its role in global trade, foreign policy, and the domestic economy will have a crucial role in determining the financial market performance. In particular, China’s position as South Korea’s largest export destination makes it the most important factor for the Korean stock market. Korea also faces a major challenge where the economic model that has worked so well for the past 60 years is visibly coming to an end.

Its economy is now fully qualified as any developed nation, but there remain transitional pains. Its outdated industries are increasingly placing a burden on its banking system at a time its egalitarian social structure is challenged due to the transformation required to produce the next phase of growth. As we saw from the global hit series Squid Game, Koreans are taking the transition especially hard, dealing with the economic and social repercussions facing the younger generation.

On the positive side, Korea’s emergence of entrepreneurs in new industries like entertainment and the internet will pave the way for future growth. But as old habits (which served Korea so well) die hard, change needs to happen at the educational level as the idea of a university degree guaranteeing a bright and prosperous future has expired. With K-pop, TV and movies being wildly successful, Korea can promote itself as a major global tourist destination.

Another transition in place for Korea is its investing culture. With overall growth opportunities increasingly scarce, the traditional culture of speculative trading for immediate gratification will have to be replaced by long-term, risk-adjusted returns. Koreans are traditionally known for their speculative and short-term trading investment culture.

As South Korea matures as a developed, advanced economy, investment culture will also need to evolve alongside. Currently, the bubbles of choice for Korean investors are Bitcoin, Tesla, and other new economy themes. Ironically, the world is moving down to the Koreans’ short-term trading style while we believe Korean investors are starting to embrace a more mature, risk-adjusted investment culture.

After a world-beating performance in 2020, the year 2021 has been a consolidation year for Korean equities. The coming presidential election is key in determining what type of the year 2022 will be, and in a year of many transitions, Korean equities will offer stock-picking opportunities for both growth and value investors. Should investors see excessive concerns over inflation or other factors, it is likely to be an opportunity to buy rather than a reason for panic.
Peter S. Kim (peter.kim@kbfg.com) is a managing director at KB Financial Group.