[Real Estate Finance] 'Interest Rate Peak Theory' Still Cautious... Investment Sentiment Shifts to Safe Assets

Investment Sentiment Shifts Toward Safe Assets Like Government Bonds
Risk Assets Such as Stocks Require Cautious Observation

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Despite the market's 'peak interest rate theory,' the investment sentiment of asset owners remains unchanged. This is due to considerable uncertainties such as the actual timing of interest rate cuts and concerns about an economic recession, despite signals of easing tightening policies from the U.S. Federal Reserve (Fed) and the Bank of Korea. As a result, asset owners tend to continue stable investments focusing on safe assets like bonds and gold/silver rather than investment assets such as stocks and real estate.

Safe Asset Preference Persists Despite End of Reverse Money Move

According to the financial sector on the 19th, the 'reverse money move' phenomenon that had continued for about a year since last year has come to an end. Central banks around the world are showing signs of easing tightening, and as market interest rates continue to decline, deposit interest rates that had been attracting market funds throughout the year are plummeting.

Fixed deposit products with interest rates in the 4% range have disappeared immediately. Among 39 types of one-year fixed deposit products disclosed by 19 domestic banks to the Korea Federation of Banks, 38 types (97.4%) have interest rates below 4% per annum. Quite a few products also fall below the Bank of Korea's base rate (3.5%). Reflecting this situation, demand deposits at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) increased by more than 10 trillion won last month alone.

However, the investment sentiment of asset owners still leans toward safe assets such as bonds rather than investment assets like stocks and real estate. According to the Korea Financial Investment Association, individual net bond purchases from the 1st to the 17th of this month amounted to 2.3808 trillion won. This is about five times higher than the same period last year (454.3 billion won) and about 1.3 times higher than the same period last month (1.8408 trillion won). The bond craze from last year seems to be continuing.

Private bankers (PBs) on the front lines explain that despite positive factors such as the Fed's signals of easing tightening and the Bank of Korea's consecutive interest rate freezes, the reason market funds are increasingly flowing into bonds, classified as safe assets, is due to anxiety over uncertain market conditions.

An official from a commercial bank said, "When talking with asset owner clients, many are still conservative in managing funds due to a lack of strong confidence in market forecasts," adding, "In the past, some invested in BBB-rated bonds with returns in mind, but now some are moving toward triple-A rated investments."

Growing Interest in Government Bonds and Gold... Stocks Seen as Short-term Peak

Government bonds are the assets investors are paying close attention to. Until January, individual net purchases of government bonds were 462.3 billion won, falling short of other financial bonds (1.1685 trillion won) and corporate bonds (835.7 billion won). However, in February, it increased to 1.0784 trillion won, and in March to 1.508 trillion won, leading individual bond buying trends. This month alone, individuals have net purchased up to 977.2 billion won in just half a month.

Government bonds are considered representative safe assets as they are issued by the government to raise funds for fiscal projects. Holding them until maturity yields interest income similar to deposits, and capital gains can also be realized through trading. 'Low-coupon government bonds' issued during low-interest-rate periods are a representative type favored by asset owners. Although the coupon rate itself is low, due to the bond's characteristic of taxing only interest income (15.4%), investors can enjoy high capital gains at maturity.

Recently, demand for bonds with relatively long durations (the period to recover principal) has also increased. Kwon Seong-jung, Gold PB Manager at Hana Bank Club One PB Center, said, "Very conservative investors invest in short-term bonds with less than one year to maturity, but recently many are interested in bonds with maturities within one to two years or long-term bonds," adding, "Double-A rated bonds are snapped up as soon as they are released."

Gold is also considered an area to consider for diversification. It has already shown a sharp rise this year. On the 4th, international gold prices surpassed $2,000 per ounce for the first time since March last year. The all-time high was $2,075.47 recorded in August 2020. Although it slightly dipped to $1,995.42 per ounce on the 17th (local time), there are forecasts that it still has room to rise. Since the Fed is expected to raise the base rate further next month, interest in safe assets is expected to continue amid tightening policies.

Regarding risky assets like stocks, advice suggests a somewhat conservative stance and observation. Although there is upward momentum due to expectations of a semiconductor industry rebound, the valuation burden has increased as this has already been priced in, which could lead to increased volatility. Concerns have also been raised that the market has overheated in the short term as investor participation has significantly increased.

According to the Korea Financial Investment Association, investor deposit funds, which serve as waiting funds for the stock market, reached 52.3987 trillion won as of the 14th. This is nearly 9 trillion won more than the 43.6928 trillion won recorded on January 10th, the beginning of the year. The KOSPI and KOSDAQ indices, which surpassed 2,500 and 900 points respectively, are also viewed as being at short-term peaks. As of the 17th this year, the KOSPI closed up 15.18%, and the KOSDAQ rose 33.9%. Among major global stock indices during the same period, the KOSDAQ's return rate ranks first overwhelmingly. The KOSPI's rise is also among the top worldwide.

Lee Woong-chan, a researcher at Hi Investment & Securities, said, "Both indices have already priced in positive interpretations of the Inflation Reduction Act (IRA) provisions and expectations of interest rate cuts following the Fed's policy shift, reaching levels similar to the pre-COVID-19 peak in early 2018," adding, "If the stock market rises further in the first half, the second half, starting from the elevated prices, is more likely to fluctuate within a range, digesting several risks rather than continuing a trend upward."

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