[Practical Finance] Investment Strategies for a Volatile Stock Market Amid Rising Interest Rates

US 10-Year Treasury Yield at 1.75%... Bottom Passed, Trend Rebound Begins
KOSPI, Which Broke 3200, Falls Over 5% Due to Rate-Driven Volatility
Experts Say "Transition from Liquidity to Earnings Market"

[Asia Economy Reporter Song Hwajeong] As interest rates rise, market volatility has increased, drawing attention to investment strategies during periods of rising interest rates.

According to the Capital Market Research Institute on the 23rd, the yield on the 10-year U.S. Treasury note rose from 0.5% in early August last year to 0.9% by the end of December, and surged to 1.75% on the 19th of this month. Researcher Kang Hyunju explained, "The pace of interest rate increases has accelerated more than threefold this year, and the level of interest rates itself has risen to the level seen in August 2019, when the U.S.-China trade dispute peaked."

The rising interest rate trend has impacted the stock market. The KOSPI, which surpassed the 3,000 mark for the first time ever at the beginning of the year and reached 3,200, has been sluggish since February due to volatility caused by rising interest rates. Compared to January 25, when the KOSPI first closed above 3,200, it has dropped more than 5%. Each time U.S. Treasury yields soared, the KOSPI fluctuated, breaking below the 3,000 level.

IBK Investment & Securities researcher Ahn Soeun said, "What triggered the global stock market correction was the rise in real interest rates, which is nominal interest rates minus expected inflation (BEI)." She added, "From 2020 to the present, examining the correlation between the two components of nominal interest rates and domestic and international stock indices, expected inflation and stock prices have a strong positive relationship, whereas real interest rates and stock prices have a clear negative relationship." The recent global market correction is attributed to the sharpest rise in real interest rates since the COVID-19 outbreak, and not only in the U.S. but also in Korea, real interest rates have passed their lows and begun a trend reversal.

Changes in foreign investor flows due to rising U.S. interest rates have also limited gains in the domestic stock market. Researcher Ahn explained, "The dollar has strengthened in line with rising U.S. real interest rates, and concerns over foreign exchange losses due to the depreciation of the Korean won, along with valuation pressures, have led to strong net selling of KOSPI shares by foreigners following the rise in U.S. real interest rates."

Although interest rates are expected to rise gradually, the stock market is unlikely to shift into a sustained uptrend. Eugene Investment & Securities researcher Heo Jaehwan said, "The acceleration in interest rate increases began at the end of January when the $1.9 trillion stimulus package was passed through the budget resolution. Infrastructure investment plans worth $2 to $4 trillion over ten years may be discussed in the first half of the year, which could lead to overheating of the U.S. economy or increased tax pressure." He added, "It is not impossible for the U.S. 10-year Treasury yield to reach 2.0 to 2.25%." Heo noted, "If the U.S. 10-year Treasury yield exceeds 2%, growth stocks may experience significant stress, but it is difficult to conclude that this marks the end of the bull market. The stock market still holds appeal relative to interest rates, though the potential for further gains is limited."

With increased market volatility due to rising interest rates, greater attention should be paid to corporate earnings. Researcher Ahn said, "The recent market correction is unlikely to lead to a sustained downtrend. Although rising real interest rates will lead to less accommodative liquidity conditions, if corporate earnings strengthen beyond that, they can offset interest rate risks. This scenario can be seen as the true beginning of an earnings-driven market."

Hana Financial Investment researcher Lee Jaeman also said, "Based on the trend of the U.S. yield curve, we are currently entering a transitional phase from a liquidity-driven market to an earnings-driven market." He explained, "One characteristic of periods when the U.S. 10-year Treasury yield rises is that stock price differentiation by sector or individual stocks in the domestic market intensifies depending on whether there is improvement in earnings such as sales or net profit." Lee added, "This is evidenced by the fact that stocks with simultaneously rising sales and net profit proportions within the KOSPI have significantly higher average annual returns. It is necessary to focus on differentiation between earnings stocks and non-earnings stocks rather than the traditional growth versus value stock distinction."

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