[Weekly Strategy] Rising Market Interest Rates... Prepare for N-Shaped Growth

Lee Jaeman Hana Financial Investment Researcher
Market interest rates will rise to 2%
Transitioning to a performance-driven market phase

[Asia Economy Reporter Hwang Junho] There is a forecast that the US 10-year Treasury yield, which has become a fear index for the stock market, could serve as the foundation for N-shaped growth if it rises beyond a certain level compared to economic growth projections. A transitional period moving into an earnings-driven market is expected, and attention should be paid to stocks anticipated to deliver earnings surprises.

Lee Jaeman, a research analyst in equity strategy at Hana Financial Investment, stated on the 21st, based on the March discussions of the Federal Open Market Committee (FOMC), which indicates the direction of US monetary policy, "Looking at the trend of the US long-short term interest rate spread, we are currently entering a transitional phase from a liquidity-driven market to an earnings-driven market."

First, market interest rates could rise up to 2%. Since the financial crisis in 2008, during periods when the US nominal economic growth rate increased, the difference with the 10-year Treasury yield was at least (-)2.7%. The average nominal economic growth rate from 2022 to 2033, as presented by this FOMC, is at least 4.4% to a maximum of 5.3%, indicating a high possibility that the US 10-year Treasury yield could exceed 2% (applying the difference: 1.7% to 2.6%).

In particular, if the 2-year Treasury yield, which is influenced by US policy rates, does not experience significant changes as it does now, the spread between long- and short-term interest rates could widen further. Currently, it is about 157 basis points. The rise in the long-short term interest rate spread generally reflects economic improvement or expansion. It is also seen as reflecting the transition from a liquidity-driven market to an earnings-driven market, so the stock market typically forms an 'N'-shaped pattern.

Based on the S&P 500 index, when the US long-short term interest rate spread rises within the range of 50 to 150 basis points, it reflects economic improvement and a liquidity-driven market, with the average monthly return recording a positive figure. However, when it rises within the current range of 150 to 200 basis points, the average monthly return falls into negative territory. Rather, if the difference exceeds 200 basis points, it reflects economic expansion and an earnings-driven market, leading to a second upward rally.

One characteristic of periods when the US 10-year Treasury yield rises is that stock price differentiation by sector or individual stocks in the domestic market becomes more pronounced depending on whether earnings improvements such as sales or net profit occur. This is evidenced by the fact that the annual average price return of stock groups with simultaneously increasing sales and net profit proportions within the KOSPI is significantly higher. Accordingly, the analyst explains that a differentiation perspective between earnings stocks and non-earnings stocks, rather than between growth and value stocks, is necessary.

The analyst said, "The consensus on corporate earnings improvement for 2021 is already mostly known," adding, "From now on, whether there is an earnings surprise (actual earnings exceeding estimates) rather than just earnings improvement seems to be important." He pointed out that SK Hynix, NAVER, LG Chem, Lotte Chemical, and OCI are among the stocks that fall into this category.