Investing wisdom of a black rabbit

By Peter S. Kim

This year, we bid goodbye to the Year of the Tiger and welcome the Year of the Rabbit. For those who care, people born in the year of the rabbit are said to be peaceful types who avoid confrontation and possess high intelligence. On the other hand, they are also susceptible to jealousy and pessimism.

The year 2023 is also notable for the year of the black rabbit, which comes around every 60 years, suggesting a magnified version. The rabbit's characteristics are timely for investors to consider after much uncertainty and volatility that the year 2022 served up. Investing in the year of the black rabbit could be marked by magnified emotional swings requiring disciplined dosages of intelligence.

Almost every year, investors seek to establish an anchor strategy founded on market-savvy moxie and disciplined research. The foundation of self-confidence is essential in navigating short-term market swings and fleeting investor sentiment. Even for professional investors, the fundamental analysis serves not only to construct investment conclusions but often as a calming antidote to distracting market noise.

Investors usually begin each year with core strategies and assumptions, some of which are "conviction calls," which industry experts consider high-probability bets. However, historical evidence shows they often end up in the trash bin well before the year is done. Today, I attempt to pull three (black) rabbits out of the hat by proposing consensus themes among industry experts to provide a balanced view on current common thought dictating market behavior.

The biggest macro debate for investors is inflation and the looming recession. After spending most of 2022 taking risks off portfolios to defend against rising interest rates, many investors are surprised by the rally in equities to begin the year, which has already shaken bearish thinking. The growing consensus is that the worst of inflation is over, and recession could be avoided.

Only a few months ago, equity investors were bracing for further downsides in markets with lively talks of a recession or even stagflation. In these times of digital information and minute-by-minute market commentary, the swings in investor sentiment are equally rapid. With recent economic numbers firming from the U.S. and Europe and a bounce in stock markets, we already have commentators raising hopes for a soft landing and a sustained rally in equities.

However, we could see a situation similar to last September when the U.S. central bank was forced to re-establish its hawkish stance with further rate hikes to keep inflation expectations from being unhinged again. Back then, after many painful rates increases, premature investor optimism led to the stock market rising with energy and commodities. The buoyant financial and real assets reversed much of the hard work as inflationary expectations accelerated again and forced central banks to tighten. While inflation may have peaked, it is too soon to call for the return of the deflationary trend seen pre-COVID. There are a few external factors remaining that could cause a temporary inflation spike, like the Russia-Ukraine conflict, crude oil prices and China's reopening.

The second consensus is that China is reopening and ready to stimulate its economy back to a pathway of growth. The Chinese stock market has risen almost 50 percent from the bottom after two years of decline. The rally began in November after President Xi's eased his stance on zero-COVID and the dovish economic policies have investors looking for further upsides in markets, some even calling for a new bull market. However, to think that China will continue to ease its policies could be premature. China has held back from easing COVID restrictions and stimulus for much of the pandemic, instead choosing the bare minimum required to achieve economic and political stability. After a recent annual communist party meeting, some encouraging signs of friendlier policies on COVID lockdown, the property market and even foreign policy led to growing bullish views on Chinese stocks.

However, the recent easing could revert to stability measures with the remaining stimulus bullets saved for when the global recession arrives. My rationale is that China will continue to play the long-term game of managing its debt situation carefully, as excessive stimulus could send China on a similar path to Japan's "lost decades." China and South Korea are remarkably similar to Japan in regard to the demographic cliff. The rising debt could be the next issue that will set China on a path of a debt spiral, jeopardizing its future growth prospects. The key policies difference between democratically elected leaders and those with open-ended terms in China could be on show in the coming months. For China, the prudent decision could be to save further stimulus for the looming global recession, which many expect will hit towards the year-end.

The third surprise could come from South Korea, where the expectation is that its central bank, The Bank of Korea (BOK), will follow the U.S. Federal Reserve (FOMC) on the rate hike path. The recent communique from its governor is that it will continue to tackle inflation following the traditional leadership of the FOMC. For most of 2022, the BOK has followed the FOMC on the hiking path. After seeing the market volatility from the United Kingdom and Japan after they diverged from the U.S. path, Korea's central bank stuck to the FOMC script. In particular, after seeing the Korean won shockingly weaken to 1,450 within a few weeks, the BOK was alerted to the vulnerabilities of unprepared market communications and policy divergence.

However, with the won strengthening back over the past couple of months, the BOK could have room to pivot to dovish policies should the calming inflation trend continue. The BOK was one of the first central banks to hike its rate back in 2021 in response to rising property prices, giving it a six-month lead on the FOMC. With declining property prices and the strengthening of the currency, the potential for Korea to ease sooner rather than later is rising.

This year there are many considerations for investors looking for an opportunity to recover the losses incurred last year. The current market optimism seems to be founded on the desire to recover last year's losses and the lure of positive market noise to begin the year. One of the timeless pearls of wisdom of investing is not to look back but forward with a fresh pair of eyes. Investors would be well-advised to lean on disciplined investment logic and look for investment opportunities that can sustain wealth accumulation based on a fundamental foundation.

Peter S. Kim (peter.kim@kbfg.com) is a managing director at KB Financial Group.