[Opinion] Follow the 4 Key Investment Principles in the 'Winter of Growing Risks'

Maintain Core Assets
Sell Non-Core Assets to Secure Cash
Cut Losses if Losses Widen
Avoid Increasing Leverage and Duration

The winter of the real economy and financial markets is approaching. This winter is a period of battling against the rapidly rising global inflation and war over the past year. In the United States, core inflationary pressures remain high due to a strong labor market and year-end consumption effects. Europe faces greater concerns about inflation than ever before as energy demand increases during the winter heating season. The U.S. suppresses demand-side inflation through strong monetary tightening, while Europe has no choice but to thoroughly prepare for a possible energy crisis.

Asian countries are in a relatively better position than the U.S. and Europe. China controls inflation concerns through price controls, and Japan has low inflation worries due to other tolerances. South Korea experiences relatively fewer supply disruptions in manufacturing and service sectors. The problem for the three East Asian countries is exchange rates. In a phase where the U.S. dollar shows ultra-strong performance, the depreciation of the yuan, yen, and won is not being controlled. Currency depreciation leads to rising import prices, increasing inflationary pressures.

Inflation and monetary tightening in the U.S. and Europe, combined with currency depreciation in Asian countries, trigger a 'Negative Spiral Risk.' This is a phenomenon where causes become effects, and effects become causes, amplifying and reproducing negative shocks. The risk repeats in a cycle of 'inflation - interest rate rise - currency depreciation - inflation.' Especially, if countries other than the U.S. sell U.S. Treasury bonds to defend their foreign exchange markets and the bond market fails to absorb them, bond prices will fall further, leading to a negative shock of rising interest rates. The rise in U.S. interest rates fuels global interest rate increases, eventually causing many defaults on debt principal and interest payments, spreading into liquidity and credit crises.

Domestic financial markets are in an extremely tense state, with interest rates and credit spreads rising due to the so-called Legoland incident, and liquidity crises spreading into credit crises. The government and financial authorities have recognized the seriousness of the situation and announced plans to reinforce bonds and liquidity exceeding 50 trillion won. The success or failure of policies depends on restoring trust among financial markets and participants. Stabilization plans will not work if fear is not overcome.

What makes inflation, monetary tightening, U.S. dollar strength, reserve currency weakness, and liquidity and credit crises more problematic is that the entire world is entering a recession. When global GDP (Gross Domestic Product) declines, almost everything contracts. If revenues decrease but expenditures are not reduced, debt increases. Consumption and investment decline, and corporate sales and profits decrease.

When interest rates rise, interest costs for companies and households increase. The macroeconomic financial condition deteriorates simultaneously. Public debt ratios, fiscal deficits, and current account deficits rise. Debt ratios for households and companies also increase, while incomes and profits decrease. Especially, the number of marginal self-employed and companies may increase significantly. There is concern that the negative spiral risk will intensify during the recession phase, leading to a prolonged slump. The only certainty about this winter is that it is uncertain.

This winter is clearly a crucial turning point for the real economy and financial markets of the world and South Korea. We have no choice but to endure a considerable period of uncertainty. However, when this period passes and the situation improves, or even if it does not improve, better decisions and actions can be taken. The process of overcoming the impending crisis itself can transform into an opportunity factor.

There are four main pieces of advice for investors in an uncertain environment. First, maintain core assets that align with your beliefs and investment philosophy, but reduce the rest to secure cash. Second, strictly adhere to the principle of realizing profits during short-term rebounds and cutting losses when losses expand for allocations and operations outside core assets. Third, this is not the time to increase leverage because interest costs are too high. Fourth, this is not the time to extend duration (the expected period for investment principal recovery), as the volatility of assets with long investment recovery periods is likely to increase.

Dongmin Lim, Economist at Kyobo Securities

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