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Analysts offer investment tips

Good bets will include U.S. firms, SMEs and emerging markets
May 15,2017
The Chicago Board Options Exchange Volatility Index, also known as the fear index, hit a 23-year low a week ago. The Vix, as it is nicknamed, plays a significant role in assessing the U.S. stock market as it measures the discomfort level of stock traders.

The lower the index is the more confident stock traders are and more willing to invest. When it rises, it means the stock market is likely to enter a bearish phase.

In fact, the Vix rose as high as 22.51 right before the U.S. presidential election last November. The situation has improved with some uncertainties clearing up.

One of the biggest risks to the global economy was the French presidential election. This ended positively with the French voting in centrist Emmanuel Macron and rejecting the arch-right Marine Le Pen, who favored France exiting the EU like the British.

The victory of liberal Moon Jae-in in the Korean Presidential election last week by a landslide was also considered positive, concluding the risks associated with a leadership vacuum after the impeachment of President Park Geun-hye last December.

Coupled with better than expected performances by Korean companies in the first quarter, the stock market finally has been moving upward after being stuck in a limited range over the past six years, prompting investors to change their investment portfolios to take advantage.

So what will the investment landscape be like in the second quarter?

Local market analysts forecast a continuing recovery of the global market including the U.S. They advise investing in small and midsize cap companies, emerging markets and even Korean companies that have been previously hurt by the tensions between Seoul and Beijing over a U.S. antimissile system.



Investing in U.S.

Analysts say the U.S. is definitely promising ground for investment.

Investment has been pouring into the U.S. market since real-estate mogul Donald J. Trump won the U.S. presidential election. Many analysts see this momentum continuing in the second half.

The U.S. economy is showing solid growth and analysts believe that Trump’s tax cut policies, if they are implemented, will have a positive influence on the real economy.

The Federal Reserve Bank of Atlanta projects the U.S. economy will grow 4.3 percent in the second quarter. If so, this would be the strongest growth since the third quarter of 2014 when the U.S. economy grew 5 percent, which was the fastest pace in 11 years.

With such positive momentum for the U.S. economy, the price of gold is falling.

According to the New York Mercantile Exchange, as of May 9 an ounce of gold bullion was worth $1,214.30. This was a 3 percent drop in just a month.

“The U.S. stock market will rise further once the corporate tax rate drops from 35 percent to 15 percent and lead to a significant increase in companies’ profits,” said Kim In-eung, head of Woori Bank’s financial center in Gangnam, southern Seoul.

Choi Chul-sik, an official at Mirae Asset Daewoo’s wealth and management center in Gangnam, also projected the U.S. economy will steadily recover in the second half.

He said investors should closely watch leading IT shares like Alphabet, Amazon and Nvidia.

Shares of Nvidia, which develops graphic chips and autonomous vehicle-related technologies, have more than tripled compared to a year ago. As of May 11, the company’s share traded at $126.5 per share compared to $35.33 a year ago.

Trump’s tax reforms, however, could face challenges as the U.S. government’s revenues could see a loss of roughly $2.2 trillion in the next 10 years if they pass through Congress.

“If the tax reforms including the huge cut on corporate tax don’t pass according to President Trump’s plan, it will have a negative impact on the U.S. stock market,” said Hwang Se-young, an executive at Citibank’s Seoul office.



SMEs to be new star

The Kospi has been breaking records recently.

On Wednesday, when President Moon Jae-in was sworn in, the market broke through the 2,300 threshold during trading. The rally owes something to the ending of Korea’s leadership vacuum, but other factors were surprisingly good results by both Korean companies and in exports and buying by foreign investors.

Analysts, however, say the Kosdaq, which has been overshadowed by the strong performance of the Kospi, will likely see significant improvement in the second half.

While the Kospi rose more than 12 percent since the beginning of the year, the secondary market Kosdaq has added only 1.8 percent during the same period.

“In a market led by blue chips, it will be a good idea to take a close interest in smaller companies, whose market capitalization is less than 1 trillion won [$8.9 billion],” said Nam Kyoung-wook, head of Samsung Securities’ SNI Gangnam Finance Center’s PB team.

“The new government is focused more on small and midsize companies rather than on conglomerates,” said Choi of Mirae Asset Daewoo. “It would be good to invest in shares that will benefit from the new government policies.”

In fact, Moon has promised to make the Small and Medium Business Administration, which is currently under the Ministry of Trade, Industry and Energy, into an independent government ministry that will have greater responsibility and the power to execute policies helping SMEs.

Although the current government’s SME administration represents small and midsize businesses, it has no power of its own to propose bills to the legislature.

The goal in expanding the SME agency is to help SMEs grow.



Take interest in emerging markets

While the U.S. stock market has been getting a lot of attention from global investors, particularly since Trump won, analysts say there are good stocks in emerging markets that have recently been showing good growth.

“Emerging markets in Asia, where many companies were lowering their forecast for this year since the end of last year, have been seeing some improvements as time passes,” said Kim of Woori Bank’s financial center in Gangnam.

Hwang of Citibank stresses India’s promise among emerging economies.

“Indians have been continuously pouring their savings into the market and the country has sufficient amounts of foreign reserves,” Hwang said.

Some analysts advise investing in consumer goods companies who export to China. Since the Korean government decided to deploy a U.S. antimissile defense system on the Korean Peninsula last year, some of those companies have seen their shares impacted.

But tensions between Seoul and Beijing may simmer down under the Moon administration.

One such company is Korean cosmetics giant AmorePacific, whose shares as of Friday closed at 345,000 won, a 20 percent drop since the Korean government’s decision was made in July 2016.

“With the new government, there’s a possibility that tensions between Korea and China over the Terminal High Altitude Area Defense (Thaad) system will be eased,” said Park Hoon-gyu, at KEB Hana Bank’s Dogok-dong private banking center. “It would be a good idea to closely follow China-related companies including cosmetics, duty free and entertainment.”


BY YEOM JI-HYUN, LEE HO-JEONG [lee.hojeong@joongang.co.kr]