[PB Notebook] Unfinished Financial Market Uncertainty, Is There an Investment Opportunity?

This year, the cherry blossoms bloomed unusually early, making it feel like spring arrived sooner, but recently, the weather has turned cold enough to pull up collars again, as if that early warmth never happened. This weather closely resembles the current economic situation.

After the economy had been tightly shut down due to COVID-19, it seemed like things were finally loosening up. However, unpredictable events such as the Russia-Ukraine war, which seemed unlikely to happen, the sharp interest rate hikes by the U.S. to combat inflation, and the resulting crisis faced by small U.S. banks have all created an uncertain environment.

Recently, the bankruptcies of Silicon Valley Bank (SVB) and Signature Bank, caused by investment failures due to the rapid rise in interest rates, shocked the financial markets. Having experienced the 2008 financial crisis, governments worldwide acted swiftly to prevent a repeat of the pre-bankruptcy process by establishing institutional funding programs. Due to concerns over U.S. bank insolvencies, FedWatch is now predicting an interest rate cut of around 1% by the end of Q4 this year. The market is fluctuating repeatedly amid fears that this mixed market could escalate into a full-blown credit crisis.

However, the real crisis for banks occurs when non-performing loans arise, and the situation has not yet reached the level of a credit crunch. The U.S. Consumer Price Index (CPI) inflation rate was 7.1% in Q4 last year. In comparison, it is expected to drop significantly to 4.2% in Q2 this year. Prices are anticipated to continue declining thereafter. U.S. corporate profits are expected to decrease, which could lead to a rise in unemployment.

Before the 2000s, interest rates were cut immediately after hikes, but since then, rates have been maintained for 8 months to a year and a half. This is also why the Federal Open Market Committee (FOMC) is expected to end rate hikes with the May meeting and possibly cut rates by the end of the year.

While the market holds expectations for a Fed pivot (a shift in monetary policy direction), the Fed’s firm stance on waiting for inflation to ease suggests that a correction phase is likely to continue for some time.

Although the risk from the SVB incident has not completely disappeared, the likelihood of an early end to U.S. rate hikes has increased. Once China’s full-scale retaliatory consumption effect appears, the stock market is expected to rebound again. Having gone through the 2008 financial crisis and the enactment of the Dodd-Frank Act (financial reform law) after 2010, stress tests under various worst-case scenarios have been regularly conducted, making it less likely for the financial system to spiral into crisis.

It will take time for psychological recovery in a market that has lost trust. There is no asset that consistently yields good returns. Recently, inquiries about high-quality bonds have increased due to the SVB incident. U.S. Treasury bonds are classified as the lowest-risk bonds, having never delayed principal repayment or payments. However, even these safe assets can incur principal losses if sold before maturity due to market conditions. For example, rising market interest rates recently have caused bond prices to fall, forcing sales at low prices.

Because of this characteristic of bonds, U.S. long-term bonds were the worst-performing asset class in 2022 during the interest rate hike period. What about this year? In 2019, the dollar and commodities were the lowest-yielding asset classes, but in 2021?2022, they ranked among the top performers. Investors should no longer repeat the foolish pattern of chasing assets that performed well the previous year.

Depending on one’s risk tolerance and the purpose of funds, conservative investors with a stable preference should invest short-term in safe government bonds and high-quality corporate bonds. Aggressive or active investors are recommended to dollar-cost average into major indices or invest in long-term bonds at peak interest rates and sell them at the bottom of rates.

Seongjeong Kwon, Head of Gold PB Department, Hana Bank Club One PB Center

원본보기 아이콘

Kwon Seong-jeong, Head of Gold PB Department, Hana Bank Club One PB Center

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.