[PB Notebook] Investment Strategies for 'Stable' Investors During Interest Rate Hikes

Contrary to the brief expectations that the monetary policy stance of the U.S. Federal Reserve (Fed) would change, the Fed’s rate hike pace is expected to accelerate due to inflationary pressures. Furthermore, with quantitative tightening fully underway, the financial markets are unlikely to escape the burden of Fed tightening until the end of the year.

Looking at the 1970s bear market, which had inflation levels similar to today, the market rebounded by retracing 50% of the decline and then moved sideways with fluctuations for a considerable period. As stock market volatility continues and high-risk, high-return investments like virtual assets face headwinds, more investors are returning to ‘safe assets.’ What investments are wise during a rate hike period? Let’s break it down by investment duration.

Short-term Investment Products

The most well-known short-term investment product is the parking account. It is a type of demand deposit that allows withdrawals and deposits at any time, often used as a temporary place to park funds waiting to be invested in stocks, real estate, or other assets. Recently, financial institutions have been raising deposit rates one after another, using parking accounts as bait products to attract consumers. More useful are revolving time deposits. During a rate hike period like now, short-term time deposits of 3 to 6 months that automatically renew at the market rate at maturity are very popular.

If you want a slightly higher alpha return, looking for high-grade electronic short-term bonds (jeondanchae) is another option. These are financial products issued and traded electronically rather than on paper, with maturities under one year. They cannot be redeemed early and are excluded from the deposit insurance system, so principal loss may occur depending on the issuer’s creditworthiness. If choosing the right jeondanchae is difficult, portfolio investment through jeondanchae wrap accounts or jeondanchae funds is also a good idea.

Medium-term Investment Products

With increased volatility in the stock market, interest in equity-linked securities (ELS) has also risen. The advantage is that if the underlying assets do not fall below a certain range, promised returns can be obtained. ELS yields have risen significantly with market interest rate increases, and there is a wide variety of underlying assets and payoff structures to choose from. Recently, choosing ELS with monthly payments to receive a fixed portion of returns monthly in a pension-like format has become popular.

Direct investment in domestic and foreign bonds is also an option. Considering the economic slowdown and the central bank’s pace of rate hikes, increasing the proportion of safe assets like government bonds is worth considering. Among government bonds, Korean government bonds, which started rate hikes earlier, are viewed more positively compared to advanced country bonds. The Korean base rate is expected to be around 3.0% by year-end, and current rates largely reflect this. Besides having competitive rates as cash-equivalent products, there is also the possibility of a decline in government bond yields (price increase) if an economic recession materializes.

Long-term Investment Products

Demand for hybrid capital securities (sinjong jabon jeunggeuk) continues to grow, especially among investors seeking stable cash flow. Despite heavy sales since the beginning of the year, rising interest rates have increased attention. Recently issued AA- rated hybrid capital securities have entered the 5% yield range, and other financial institutions also plan additional issuances.

Hybrid capital securities have characteristics between stocks and bonds but meet certain capital recognition requirements, so financial authorities recognize them as capital. They are perpetual bonds with call options granted after a certain period. In case of issuer bankruptcy, repayment priority is behind general bonds and subordinated bonds. Considering that debt repayment is ‘sub-subordinate’ compared to other bonds, the credit rating of hybrid capital securities is lower than that of the issuer’s senior bonds.

However, since banks’ capital ratios are unlikely to deteriorate sharply, the possibility of write-offs, interest payment suspensions, or early redemption non-execution of hybrid capital securities is considered limited. For safe investment, it is advisable to focus on high-credit-rated, reputable banks.

Among insurance products, 10-year fixed-rate products have started to be launched. If you believe the current interest rate level will not last for 10 years, there is no reason not to choose them. You can select between receiving interest at maturity or receiving interest monthly like a pension.

The rate hike period is attracting investors to attractive safe assets. However, there is no clear standard for what constitutes a safe asset. Safe assets can vary depending on investors’ preferences and life cycles. Risks and volatility exist everywhere, so safe investment destinations may differ depending on the level of returns you seek in the current economic environment.

Im Eun-soon, Deputy Director, KB WM Star Advisory Group THE FIRST CENTER