[Practical Finance] Changes in Investment Environment and Financial Asset Management Due to COVID-19

Myeong-Yeol Lee, Investment Specialist, Marketing Capability Team, Hanwha Life Insurance

[Asia Economy Reporter Oh Hyung-gil] The novel coronavirus disease (COVID-19), which occurred without warning, has changed our daily lives and life patterns and brought changes to the investment environment. The changes in the investment environment can be seen from three perspectives, and asset management solutions must be prepared to respond accordingly.

First, the 'zero interest rate' era has arrived in South Korea due to COVID-19. To overcome zero interest rates well, corresponding strategies are necessary. Second, as a result of COVID-19, volatility in domestic and international stock markets has expanded sharply. Strategies that utilize volatility advantageously are required. Third, in response to COVID-19, countries including South Korea are actively pursuing economic stimulus measures. Strategies to seek profits by utilizing new growth engines are needed.

Let's look at ways to respond to the zero interest rate era. The Bank of Korea lowered the base interest rate twice to mitigate the shock COVID-19 inflicted on the economy and financial markets, resulting in the current rate of 0.5%, the lowest ever. In the high interest rate era, compound interest deposits, where interest accumulates on interest, were a good way to grow assets, but in the zero interest rate era, the magic of compounding does not work.

Therefore, first, you need to secure an interest rate higher than zero. You should carefully check special term deposits or preferential interest rate products sold in the financial sector. Especially for long-term funds, managing them as long-term assets such as insurance can secure a higher interest rate than commercial bank deposits and a publicly announced interest rate with a minimum guaranteed rate.

Let's examine ways to respond to the increased stock price volatility brought by COVID-19. Until now, the domestic stock market maintained a box range where it neither rose nor fell beyond a certain range.

The KOSPI was trapped between 1800 and 2100 from 2011 to 2016, leading many investors to leave due to perceptions of a boring market and lack of profit opportunities.

After COVID-19, stock price volatility intensified, with the KOSPI plunging from around 2000 to 1400 in just 9 trading days in mid-March this year, then soaring nearly 70%. Buying low when stock prices fall sharply and selling high when they rise sharply can utilize volatility advantageously. The problem is that the most difficult thing in the world is to catch the bottom and the top.

Rebalancing between interest assets and investment assets can help with buying low and selling high. If you initially invested your surplus funds half in deposits and half in stocks, you regularly adjust the fixed proportion of stocks.

For example, if you check your asset ratio after six months and find that stock prices have risen significantly, changing the deposit-to-stock ratio to '2 to 8,' you sell some stocks at a high price to restore the ratio to half and half. Then, if six months later stock prices fall and the ratio changes to '8 to 2,' you withdraw cash from deposits to buy stocks at a low price and return to the original ratio.

Another way to utilize volatility is installment investment or monthly payments. When stock market volatility is high, instead of investing a lump sum, spreading investments monthly allows you to buy more shares when prices are low and fewer shares when prices are high, averaging the purchase price per share. When a lump sum is formed through monthly installments and profits accumulate, periodically realizing gains and reinvesting is efficient.

The third investment environment change caused by COVID-19 is the active economic stimulus policies of governments worldwide and the rise of new growth engines. The government announced the 'Korean New Deal,' a development strategy to overcome the crisis and lead the global economy post-crisis. The core is the Digital New Deal to accelerate the digital innovation economy such as data, networks, and artificial intelligence, and the Green New Deal to respond to global climate change and foster eco-friendly industries. Non-face-to-face digitalization and low-carbon eco-friendliness are global trends.

Industries related to the Digital New Deal such as data, 5G, and untact, and industries related to the Green New Deal such as renewable energy, electric vehicles and batteries, hydrogen vehicles, and fuel cells are expected to benefit. Considering that digital and eco-friendliness have become global trends, fluctuations are inevitable, but long-term growth is promising.

However, investing in individual stocks, no matter how much they are growth or blue-chip stocks, exposes you to unexpected sudden variables and risks. Therefore, risk must be managed by diversifying investments across various assets such as domestic and international stocks and implementing phased trading.

Rather than concentrating investments in some individual stocks, using funds that invest evenly in many blue-chip stocks is also an appropriate method. Variable insurance, a long-term investment-type insurance, can invest in various funds such as domestic and international stocks, domestic and international bonds, commodities, and infrastructure with a single product. It offers various risk management options such as tax benefits, fund switching functions, and risk protection functions, making it worth considering for long-term investment.

Lee Myung-yeol, Investment Expert, Marketing Capability Team, Hanwha Life Insurance

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