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Deflation here, but market good

Equity returns solid despite falling prices, brokerage forecasts
Nov 08,2019
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Chan Hwang, representative director at Macquarie Securities Korea, discusses Korean markets and economy at Conrad Seoul in Yeouido, western Seoul, on Thursday. [MACQUARIE SECURITIES KOREA]
Deflation is here, but stocks are likely to rise starting next year, according to the head of Macquarie Securities Korea.

Chan Hwang, representative director at the brokerage unit of Australia’s Macquarie Group, says the pace of consumer price rises has been low for some time.

“Core inflation, which strips out volatile food and energy prices, has been on the decline over the past five years,” he said during a press conference held in Yeouido, western Seoul.

“It can be said that deflation is already taking shape,” he said.

The comment is at odds with the view of the government and the central bank, which argue that the downturn in consumer prices is largely the consequence of one-time factors, such as falling agricultural product prices.

After a minus 0.038 percent on-year change in the consumer price index in August - which was rounded up to 0 percent - Korea posted the first negative reading of that number in September, at minus 0.4 percent.

Hwang was positive about Korean stocks as he believes the economy has just about hit bottom.

“The Korean economy is at a critical inflection point,” Hwang said, “Korea has gone through a downward phase from the perspective of economic cycle, but it will hit bottom in the fourth quarter.”

He acknowledged potentially negative factors, such as the U.S.-China trade war remaining, but said the uncertainties related to those events have been priced into the market.

His view reflects analyst projections that the semiconductor industry will show signs of recovery next year.

Against this backdrop, Hwang recommended semiconductor and electric vehicle battery manufacturers, since the sectors will enjoy strong demand.

He also picked cyclical stocks, whose prices are affected by macroeconomic and systematic changes in the overall economy.

China will likely come in with a stimulus package early next year to keep its economic growth above 6 percent, he forecast.

The measure will be “infrastructure spending in the first or second quarters next year,” according to Larry Hu, head of China economics at Macquarie Capital at the press event.

Viktor Shvets, head of Asian Strategy at Macquarie Capital, noted the quandary facing central bankers and policy makers around the world, as the monetary policies will not be as effective as in the past.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]