Inflation Fear "Patience Needed Over Giving Up"... Respond with Value Stocks and Investment Grade Bonds

[Asia Economy Reporter Lee Seon-ae] Although the fear of inflation has struck the global financial markets, investment advice suggests responding with patience rather than giving up. This means taking time as the possibility of having passed the peak of inflation remains valid. In particular, in markets with high volatility during this period, an investment strategy favoring value stocks and investment-grade bonds has been proposed.

On the 15th, Korea Investment & Securities recommended responding with value stocks and investment-grade bonds in volatile markets, stating that the announcement of the US Consumer Price Index (CPI) for May delayed the passing of the inflation peak. On the 10th (local time), the year-on-year increase rate of the US CPI for May was 8.6%, exceeding the market expectation of 8.3%.

Jang Hyun-chul, a researcher at Korea Investment & Securities, said, "As a result, this event thoroughly shattered the market's expectations of the scenario 'passing the inflation peak → easing of tightening → weakening possibility of recession.' With the arrival of inflation fears, concerns about tightening and recession have resurfaced, and the futures market reflects that financial market participants have accelerated their expectations for interest rate hikes."

He added, "Since the Ukraine situation continues, the likelihood of a sharp slowdown in energy and food price increases seems low, so the possibility of a significant slowdown in the US CPI increase rate for June, to be announced next month, is not high. Even if a lower figure than May is announced, the market will find it difficult to trust that the inflation peak has passed, and the Federal Reserve's stance on tightening will not become more accommodative," he predicted.

However, he noted that it is still too early to judge whether the scenario of continued inflation pressure → accelerated tightening → recession is inevitable. He emphasized, "It is highly likely that the passing of the inflation peak has not been canceled but delayed. The peak, initially expected in the second quarter, may appear from the third quarter."

The basis for this includes the fact that from the June US CPI increase rate onward, calculations are based on a higher base effect (April 2021 4.2% → May 5.0% → June 5.4%), the slowdown in global COVID-19 spread, and the consensus for the US CPI increase rate by the end of this year is 6.3%, which is more than 2 percentage points lower than the current level.

Researcher Jang advised, "It is clear that some time is needed to gain confidence in passing the inflation peak and to improve the worsened investment sentiment accordingly, and although it may not be a recession, a phase of economic slowdown will continue," recommending a portfolio centered on value stocks and investment-grade bonds.

He said, "For bonds, I prefer investment-grade bonds with yield appeal over government bonds. For stocks, regardless of region, a value stock-centered response is necessary to cope with the current phase of increased volatility." He added, "From a mid- to long-term perspective, selective investment in industrials, materials, and financial sectors, which have experienced significant valuation declines and maintain earnings momentum, as well as in IT and energy sectors, is expected to be effective."

This content was produced with the assistance of AI translation services.