A Belated Year-Ahead Outlook on Equities & Real Estate (2020)

I always come down with a really bad cold around Chuseok and Lunar New Year, and this year too, starting from last weekend (the 18th), when the fine dust was at its worst, I was coughing and sneezing like crazy and even developed a slight fever, so I spent the whole week bedridden.

I had to cancel two meetups, including one with a friend who was briefly visiting from the U.S., and on Lunar New Year’s Day I only visited my parents’ place for a short while before coming back and sleeping for 20 hours straight to recover. I still have a bit of a cough, but the fever is completely gone, and only now do I finally feel a little more clear-headed.

Now that I’m finally starting to come to my senses, apparently Wuhan pneumonia (coronavirus) is now raging all over the world… I can only marvel at the Moon administration’s humanitarian policy of treating foreign pneumonia patients with taxpayers’ money.

Year-End Review on Equities & Real Estate (2019) (2020.01.21.)

As I wrote in the post above, my outlook for 2019, written at the end of 2018, turned out to be right across the board.

What follows is my outlook for this year’s markets. The previous post ended up being longer than I expected, so I split it in two.

The prospects for the 2020 General Election, the equity markets, and real estate are as follows. I am still not fully over this cold and cannot be bothered to lay out all the evidence, so I will just put down my own off-the-cuff views and revisit them around this time next year.

The General Election Outlook (2020)

While a consensus exists among the discerning public that the Democratic Party ought to face—and will face—a crushing defeat, the “Cho Kuk scandal” served as a stark reminder that the sheer numerical weight of low-information voters should not be underestimated. For me, observing the “Gangnam Leftists”—specifically, the hypocritical conduct of the 1980s academic cohort from prestigious institutions—served to reconfirm the formidable and perilous nature of ideological entrenchment.

ECK note: The term “Gangnam Leftist” in Korea is equivalent to “Latte Liberal” (US), “Champagne Socialist” (UK), and “Gauche Caviar” (France).

Paradoxically, those who might truly be characterized as the ‘common people’ are furious—just as they were in the Roh years—at what they see as outright betrayal. “We backed him all the way to the presidency, and all that happened was that the rich with stacks of cash got even richer while our lives got harder. This is neither communism nor capitalism, and I have no idea what is happening to the country.” Those are the exact words I heard from a former official from the civil service union. Meanwhile, many of these highly educated Gangnam Leftists appear either trapped in the ideological reflexes of the 1980s or weighed down by a kind of survivor’s guilt: back when their classmates on the front lines of the democracy movement suffered and their lives went off course, they themselves were able to sit comfortably and study, and now they feel they are immorally enjoying the fruits of that.

Many of them came of age in an era when elite credentials were easier to monetize despite far lower competitive pressures than those faced by younger cohorts today. Having benefited from a far more forgiving economic and social environment, this cohort now often speaks to the Echo Boomer generation—those born from the mid-1980s to the early 1990s, arguably the most rigorously educated generation in Korean history—in a patronizing tone. The resulting intergenerational mismatch is difficult to ignore.

Middle of all this, the opposition crowd―Liberty Korea Party, often so-called Republican Party of Korea―has failed to present a coherent alternative, leaving anti-government sentiment without a clear rallying point of the kind that emerged during the Park years. My conclusion is that the Democratic Party will not suffer a crushing defeat in this year’s general election. I think they will take at least 40%.

Stock Market Outlook (2020)

I think U.S. stocks will sustain their upward trajectory at least through the first quarter, and potentially through the second, despite emerging cautionary signals. Korean stocks, however, as I wrote before (see the article below), will not rise in tandem with the global rally to the same extent. They will be affected to some degree, of course, but that is a different matter.

South Korea Becomes World’s Worst Major Equity Market in ‘19 (2019.08.06.)

Regarding U.S. stocks, my longstanding axiom remains operative: “You should not invest in a country whose language you do not even speak." Investing in U.S. stocks started spreading almost like a fad around the middle of 2018, but my sense is that many of the people buying them are doing so without a firm grasp of even the basic disclosure architecture, such as 10-Ks and 10-Qs.

Furthermore, Korea adheres to IFRS, whereas the U.S. utilizes US GAAP. Notwithstanding the ongoing convergence of these frameworks, fundamental discrepancies remain—most notably in the accounting treatment of R&D expenditures. Given that the majority of investors are buying into the U.S. market are investing in IT or healthcare names, typically the FAANG—sectors defined by substantial R&D outlays—it is doubtful whether many of them are forming disciplined estimates of cash flow from operations (CFO) before investing.

When one considers the hurdles, ranging from terminology to complex accounting methodologies, the U.S. market presents significant barriers to entry for Korean retail investors. So I honestly do not know what kind of strategy they are using when they buy U.S. stocks. Most of them seem to be buying Google or Facebook, and if they branch out a little further, Tesla and Blizzard. I hope they are investing with at least some awareness of one fact: when the broader market collapses, the diversification effect falls close to zero. It is basic portfolio-theory material, so anyone curious can look it up.

While dividend investing has become popular among retail investors since two years ago, I posit that stocks exhibiting superior YoY growth in revenue and operating profit will lead the market, not simply high dividend yield. Such metrics signify structural resilience and internal consolidation during periods of duress. The ideal candidates would additionally exhibit an increase in YoY CAPEX. For those who are not yet sufficiently capitalized to subsist on dividends from multi-billion won positions (e.g., in KT&G), dividend yield should be a secondary concern during this Arduous March.

The current short-term correction—precipitated by the Wuhan pneumonia issue having spread over the Lunar New Year holiday—will facilitate a “bargain sale,” separating the wheat from the chaff and rewarding value investing. I recommend a tactical approach: ⑴ trading in rotations or swings and targeting 10–15% gains for smaller portfolios; ⑵ planting seeds and waiting at least a year with sowing season mentality for larger capital pools for greater results.

Historically, top-down analysis has worked better than bottom-up in the Korean stock market, unlike the U.S. market. However, I believe a bottom-up strategy will be more effective this year—or perhaps starting this year. The overall market will probably keep trending upward, but with heavy volatility and without significant aggregate gains. I expect specific sector leaders to exhibit extraordinary performance.
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Real Estate Outlook (2020)

It is by now surely evident that markets have repeatedly rewarded positions that diverge from the Moon administration’s policy intent. Those still unconvinced by this view may be better served, for now, by principal-protected financial products such as installment savings plans

I do not expect the same kind of vertical move we saw last year, when Gangnam apartments that had been worth KRW 1 billion blew through KRW 2 billion in half a year. While Seoul apartments have appreciated significantly, income-producing multi-family properties—especially outside Gangnam, things like officetels, villas, or five- to six-story buildings that can generate monthly rent—have seen price stagnation or declines, prompting cash-rich investors to quietly buy them up. The structure in which ‘money makes more money’ has only deepened, consolidating the “league of their own”.

To be clear, the absence of a rapid surge does not imply a price contraction. Rather, I anticipate a period of low transaction volume due to supply constraints. However, the administration cannot maintain credit restrictions indefinitely; following the general election in coming April, they will likely test the waters. I expect the resulting explosion of suppressed demand to trigger a secondary price surge, potentially as early as the latter half of this year, but more likely in 2021.

If one can still secure residential exposure in Seoul—especially in Gangnam—that would be ideal. Failing that, the broader Seoul metro area and some of the major provincial cities also appear promising. As demand inevitably overflows from Seoul, it will permeate the periphery. The areas I was watching early last year were: the neighborhoods around Eunpyeong-gu (specifically Susaek and Gupabal bordering northern Gyeonggi), the areas around Suseo-dong (bordering southern Gyeonggi near Cheonggyesan), and the Daebang-dong area (including Shindaebang and Sillim). If I were to widen that a little further, I would add the second-generation new towns such as Gimpo New Town (around Janggi-dong) and Namyangju New Town (around Byeollae-dong), major metropolitan hubs, and regions housing large-scale industrial complexes (such as Asan in South Chungcheong). These places may not rise dramatically, but they still look worth watching.

If both the Eastern and Western classics tell me to hide, then hide I shall.

I wish all of you success in whatever you set out to achieve in the Year of the Rat, and I hope this will be the year in which you move one step closer to emigrating from this increasingly suffocating Joseon.