[2024 Risk Management] ② "Time for Verification... Basic Judgment of Appropriate Stock Price"

This Year’s Variables: US Interest Rates, Economy, and Presidential Election
Time to Verify Last Year’s Market-Leading Sectors and Companies
Assess Fair Stock Prices Using PER and Earnings Growth

Editor's NoteLast year, the investment market was shaken by the US interest rate hikes and geopolitical conflicts. Now it is 2024. This year, the US is expected to gradually lower its benchmark interest rates. Important elections in various countries, including the US presidential election and the South Korean general election, are also scheduled one after another. Amid various variables, what strategies should investors adopt? We met with experts from major domestic asset management companies specializing in exchange-traded funds (ETFs), stocks, and pensions to review last year's investment market and discuss risk avoidance measures and investment strategies for this year.

Three experts interviewed by Asia Economy?Kim Seong-hoon, Head of ETF Business Division at Hanwha Asset Management; Song Jun-hyuk, Head of Growth Division at Baering Asset Management; and Son Su-jin, Head of WM Pension Marketing Division at Mirae Asset Management?emphasized the importance of diversification and systematic investment from a risk management perspective as the investment strategy for 2024. Proper diversification between stocks and bonds can provide a buffering effect. They especially recommended active diversification through exchange-traded funds (ETFs). They also stated that efforts to accurately assess appropriate stock prices are essential to increase returns. The market volatility this year is expected to be high due to a series of major elections in several countries, the US interest rate cuts, and economic factors. The conflict between the US and China was also cited as a variable.

Song Jun-hyuk, Head of Growth Division at Bearing Asset Management. Photo by Kim Dae-hyun kdh@

"Last year, the stock market was a very favorable environment for growth stock investors until the first half, but stock prices adjusted rapidly from July to October. The burden from the first half's gains and the slow decline of interest rates and inflation were variables. In that sense, it was a year marked by polarization among stocks."

This is how Song Jun-hyuk, Head of Growth Division at Baering Asset Management, reflected on last year's stock market during a recent interview at Baering Asset Management's Korea headquarters in Jung-gu, Seoul. He said, "It was a year when investors' dreams and expectations significantly drove up stock prices. In fact, expectations are reflected in stock prices first, and then those expectations are realized and reflected again." He added, "From that perspective, except for the seven big tech companies known as the 'Magnificent 7' in the US, stock prices did not rise significantly. Our domestic market also experienced considerable concentration in specific sectors and stocks."

He continued, "However, this year will likely be a time to thoroughly verify whether investors' expectations materialize." He pointed out, "Companies that saw significant revenue growth last year will have their profitability tested this year, and companies that have not yet generated revenue will be verified on whether actual sales occur. This will apply to the industries and companies that led the market last year."

As major variables in this year's market, he cited the timing of the US Federal Reserve's (Fed) interest rate cuts and the US economy. Song said, "In fact, the issue with interest rate cuts is the timing and magnitude, but overall, rate cuts are expected between March and June. The Fed's benchmark interest rate is still higher than that of South Korea. We need to observe further when the Bank of Korea will join the Fed's rate cuts." He analyzed, "A bigger variable is the US economy. If the economy declines gradually, the stock market will be quite positive, but if the decline is steep, it will be negative for the overall market."

The US presidential election is also a variable. He said, "The direction of the US Inflation Reduction Act (IRA) policy will also affect the South Korean stock market. Since the Biden administration of the Democratic Party has ambitiously pursued this policy, if the administration changes to the Republican Party, significant changes are inevitable." He added, "In that case, sectors such as renewable energy and electric vehicles may generally perform poorly both domestically and internationally."

Regarding investment strategy, he emphasized 'judging appropriate stock prices.' Song said, "The most common type of investor is one who enjoys brief gains but suffers for a long time. These are usually people who started investing when stock prices were rising." He stated, "There are still companies whose stock prices are too high. Even within the same industry, investors need to judge how attractive a particular company's stock price is before investing."

How can one judge an appropriate stock price? He said, "First, how much money the company makes is the most important factor. Then, you need to look at how much it will earn in the future, that is, its growth potential. The basic indicator is the price-to-earnings ratio (PER), but you need to consider both the company's PER and its future earnings growth." He explained, "If earnings growth is high, the valuation (stock price relative to company value) can be considered high. Conversely, if earnings growth is low, the valuation should be discounted. Nowadays, analyst estimates can be easily checked in the stock information section of portals."

Additionally, Song added, "No matter how good a company is, its stock price does not rise forever. Stock prices go up and down. Therefore, a strategy to judge appropriate stock prices is essential."