Korea Strategy:US Election,Uncertainties will be key rather than fundamentals

Macquarie Economics Team believes the fundamental impact will not beas big as the market fears: David Doyle, Macquarie Head of US Economics,believes there could be negative impacts on economic growth for the shortterm mainly due to uncertainties rather than fundamentals. He believes itcould be a delay of the growth instead of a loss of the growth. Also, while headmits the chance for December rate hike decreased, it remains his basecase scenario (See Macq-ro insights: Trump and the long durable expansion,9 November 2016).

Uncertainties could be bigger and stay longer than the Brexit: Thebiggest uncertainty should be in trade, in our view. From this context (movingback to protectionism from globalization), we think the result of US election issimilar to the Brexit vote. However, we think uncertainties could be bigger andstay longer. First, the presidential inauguration (20 January 2017) is muchmore imminent than the Brexit. Second, the scale of US economy andgeopolitical influence are much bigger and wider than those of the UK. Third,the timing is worse for Korea, as we cannot expect any strong policy reactionsdue to political scandals engulfing President Park.

Volatility and pressure to stay for the time being: We believe that riskappetite will remain low in a foreseeable future, which means risky assetsincluding equities, Korean Won, and/or global oil prices will remain underpressure until risk appetite recovers. On the other hand, haven assetsincluding gold, fixed income assets, and underlying currencies could remainstrong. Potential negative impacts on global trade could be a long-term threatto the Korean economy.

For the short term, we recommend investors to switch to domestic playswith resilient fundamentals – banks, non-lifers, defense sectors, andselected consumer names: With unprecedented risk from potential USmoving to de-globalization, uncertainties over exporters could remain.

However, we are selective even for domestic plays based on fundamentalprogress. Among domestic plays, we prefer KB FG, HFG, Hyundai M&F,E-Mart, and Naver. Also, due to potential risks on geopolitics, defense sector(KAI and LIG Nex1) could fundamentally benefit.

However, we need to consider the flip side – we would try to find goodentry points for exporters: First, de-globalization will not affect only Koreancorporates and thus won’t affect the pricing competitiveness of Koreanproducts unless they compete with US corporates. Second, Korea’s exports toUS are only 13% of total exports. Third, a potentially weak Korean Won tohelp Korean exporters’ profits. Hence, we maintain our bullish stance on SEC,given its technology leadership could minimize negative impacts. In addition,Korean auto makers’ exports to US (from Korea) are much smaller than themarket’s perception (6% of HMC’s sales in 2015). Among Korean auto/autoparts makers, we prefer HMC. In addition, we have learned that weak globaloil prices are not necessarily negative for Korean oil/chemical names. Weprefer Lotte Chem and SK Innovation among oil/chemical stocks.