[PB Notebook] Continued Interest Rate Hikes... Portfolio Rebalancing Over Vague Fears

Heo Dokyung, Head of PB Team at Shinhan PWM Mokdong Center

Editor's NoteWe introduce asset management strategies proposed by financial firms' PBs (Private Bankers) through [PB Notebook]. The idea is to take a look inside the notebooks of PBs.

Investors often fall into a state of 'vague fear' due to the benchmark interest rate hikes in the United States and other countries around the world. Both the stock and real estate markets remain stuck in a recessionary path, and it is difficult to gauge the entry point for savings and time deposits as interest rates rise almost daily.

The decline in currency value that triggered inflation is a side effect of unlimited money supply. This was influenced by the global quantitative easing policy, which was inevitable to recover from the shock caused by the COVID-19 pandemic.

This trend inevitably led to inflation with rapidly rising prices. The occurrence of successive variant viruses intertwined with various factors such as global supply chain issues, wage increases, and production falling short of demand.. Ultimately, the Biden administration in the U.S. also felt burdened by the fact that additional economic stimulus measures could fuel inflation, and the U.S. Federal Reserve (Fed) shifted to a tightening stance from early this year.

So how will the situation unfold going forward? The Fed indicated that it would continue raising interest rates for the time being in the second half of the year but that the pace and magnitude of hikes could be adjusted depending on future economic indicators. Therefore, under such expectations, investor sentiment is expected to recover to some extent.

However, it is still true that it is difficult to prematurely judge the timing of inflation peak-out or the possibility of a soft landing for the economy. In particular, the fact that the U.S. has entered a 'technical recession' with two consecutive quarters of negative GDP growth despite a robust labor market is highly suggestive.

Therefore, considering the remaining uncertainties, investors are recommended to adopt a somewhat conservative asset allocation with a ratio of 40% risky assets to 60% safe assets. First, short-term liquidity funds should be managed through electronic short-term bonds, money market deposit accounts (MMDA), and relatively short-term fixed deposits with maturities of 3 to 6 months.

It is also a good time to invest in high-quality bonds. The U.S. benchmark interest rate is expected to rise by about 1.0 percentage point (p) to 3.25?3.5% by the end of this year compared to the current level, but the pace of rate hikes is expected to slow down. Similarly, in Korea, interest rate hikes will continue for the time being, but the increase is expected to return to 0.25 percentage points.

As the market has already priced in a significant portion of the rate hikes expected by the end of the year, the rise in bond yields is not expected to be large. In particular, at this point, we recommend long-term bonds of high-quality corporate bonds with annual yields of 4?5%, and suggest a strategy of purchasing corporate bonds issued 1?2 years ago with a coupon rate around 1.5% at reduced bond prices, holding them until maturity to receive the principal. This strategy is also recommended as a tax-saving strategy for high-net-worth individuals with high comprehensive income tax rates through the non-taxation benefit of bond trading gains.

However, premature stop-loss selling of currently held stocks for rebalancing is not advisable. Although the shocks of inflation and interest rate hikes are ongoing, past experiences during periods of rising interest rates show that the stock market tends to trend upward in the long term. Interest in sectors related to consumer goods and industrial goods, whose earnings consensus is rising after the Q2 earnings announcements, remains valid.

In summary, now is the time to respond to market volatility by building a conservative portfolio and to increase the proportion of risky assets after clear signs of inflation slowdown are detected.

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