Concerns about an economic recession are growing due to high interest rates, high exchange rates, and high inflation, deepening investors' worries. Although the previously stagnant global stock markets seemed to rebound briefly, there are fears that a bigger crisis may be approaching. In such an uncertain market environment, it is not easy to decide the direction by looking at the investment compass alone. Asia Economy listens to the investment strategies of 'big players'?institutional investors who move the market with decades of experience managing large-scale funds, know-how, and strict investment principles. We will preview the investment directions of institutions through this fall, winter, and early next year, helping Asia Economy readers fine-tune their investment steering.
Stock and bond prices reflect recession in advance... cautious approach needed for alternative assets
Han Jong-seok, Chief Investment Officer (CIO) of the Police Mutual Aid Association, sees a high likelihood that a certain level of economic slowdown and recession due to rising interest rates will continue throughout the second half of the year. While traditional asset classes such as stocks and bonds have already priced in a significant degree of economic downturn, he advised that alternative assets often coincide with or lag the economy, requiring a cautious approach.
He emphasized, "In the second half, we will strengthen investment activities focusing on stocks and bonds, which have reached appropriate valuation levels and are easy to manage liquidity, and for the time being, we will combine highly selective investments and exit strategies for financial alternative investments and real estate."
The Police Mutual Aid Association has set a policy to increase investment returns to around 7-8% in the mid to long term, predicting the next 10 years as an era of high interest rates and high inflation. Financial markets undergo major transformations roughly every 10 years; the past decade was characterized by low growth, low inflation, and low interest rates. It was an era where a structure generating stable returns of 5-6% with moderate risk was acceptable.
Han said, "Looking ahead to the next 10 years, inflation is already moving, and high interest rates have followed accordingly," adding, "With rising market interest rates, members' required returns are increasing, so we plan to put greater effort into improving investment returns."
Increase assets guaranteeing continuous income such as interest and dividends... rapid economic recovery is difficult
The Korea Local Government Officials Mutual Aid Association plans to increase liquid assets and interest-bearing assets that guarantee continuous income such as interest and dividends to respond to the uncertain investment environment.
Heo Jang, Chief Investment Officer (CIO) of the Administrative Mutual Aid Association, expressed concern, saying, "The atmosphere has improved a lot in the past month or two, but believing that recovery will happen so quickly is too naive."
Heo predicted that aftereffects will continue for a considerable period. However, he noted from experience with the financial crisis and COVID-19 that market crashes can be opportunities. He added, "Inflation is happening for the first time in 40 years, so the current situation is tough for everyone," emphasizing, "The primary mission in an uncertain environment is to maintain asset soundness."
For the time being, efforts will focus on maintaining an appropriate liquidity ratio in the portfolio. Heo said, "The first strategy is to secure liquid assets that can be converted to cash," citing examples such as increasing short-term loans or corporate bonds. He also mentioned, "If it is difficult to generate returns from equity assets like stocks, it is important to secure interest-bearing assets that can offset financing costs, i.e., interest burdens." Heo added, "When others are enjoying a boom, reduce investments, and conversely, when things look very bad, gradually increase investments to achieve successful long-term investment."
Major IBs continue to lower growth forecasts... focus on high-quality bonds, ETFs, and loan investments
Lee Do-yoon, Head of Asset Management at Noranwoosang (Yellow Umbrella), set a second-half operation plan focusing on high-quality bonds, ETFs (Exchange-Traded Funds), and loan investments.
Lee said, "With a sharp rise in market interest rates, bond assets that significantly exceed the initially planned target returns have expanded," adding, "For AA-rated or higher corporate bonds with maturities of 3-5 years, it is possible to secure operating returns that exceed Noranwoosang's overall target returns." The Bank of Korea's base rate was raised from 1% at the beginning of this year to 2.5%, pushing government bond yields above 3% and corporate bond yields above 4%. This level matches the returns recorded by Noranwoosang over the past three years (3-5%).
Regarding the stock market, he judged there was a temporary 'bear market rally' (technical rebound in a bear market). Lee said, "We once again felt the high volatility of the stock market," and added, "We continue to adjust towards safe sectors within the stock market and are increasing the use of ETFs that allow timely responses along with mid- to long-term investments."
In the alternative investment sector, he forecast a delayed adjustment effect. He said, "After a significant adjustment in the public market, we expect an adjustment in the private market in 1-2 quarters," and added, "We are responding conservatively to alternative investments, focusing more on blind investments than projects, and on loan investments rather than equity investments."
He predicted that the focus of the financial market in the second half of this year will shift from inflation to economic slowdown. Lee explained, "Major investment banks (IBs) continue to lower growth forecasts," noting, "Growth rates in major regions such as the global economy, the U.S., and the Eurozone have been revised downward for 9-10 consecutive months since peaking last October."
He added, "The U.S. Federal Reserve is not stopping tightening, based on unemployment rates at full employment levels, and under the label of 'data-dependent,' it is not indicating when the tightening cycle will end." He cited the deterioration of the corporate bond issuance environment as another risk that a recession could bring, expressing concern that "credit events may occur in lower credit segments."
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