[PB Notebook] "Hold the Bat Short and Embrace the Low Point"

Market Focuses on Economy Over Interest Rates
"Time to Sell Approaches Amid Fear... Prepare Considering Fund Characteristics and Investment Preferences"

Editor's NoteWe introduce asset management strategies proposed by financial institutions' PBs (Private Bankers) through [PB Notebook]. The idea is to take a look inside the notebooks of PBs.

At the November meeting of the U.S. Federal Open Market Committee (FOMC), as expected, the benchmark interest rate was raised by 75 basis points (bp; 1bp=0.01%) for the fourth consecutive time. Jerome Powell, Chair of the U.S. Federal Reserve (Fed), disappointed markets that were hoping for a policy shift by stating, "It is still premature to discuss a change in monetary policy, and the terminal rate will be higher and persist longer than the market had anticipated."

However, the market is showing a different pattern compared to the past. Last month, the U.S. recorded nonfarm employment and wage growth rates that exceeded expectations. Under normal circumstances, this would have intensified concerns about additional inflation, leading the Fed to raise rates more aggressively, which would have caused the dollar to strengthen and stock prices to fall sharply due to market sensitivity. Instead, the market cheered the possibility of a soft economic landing and continued its sharp rise. This indicates that the market has started to focus more on the economy than on interest rates.

According to the FOMC's dot plot, the U.S. benchmark interest rate is expected to rise to between 5% and 5.25%. The key question is whether the rate hike will lead to a rise in the dollar's value. Recent trends suggest a possible decoupling between these two indicators. This raises expectations that the time to gradually implement a 'buy on fear' strategy is approaching.

Conservative investors are recommended to invest in traditional blue-chip stocks led by sector leaders or dividend stocks targeting year-end effects, rather than technology stocks which are relatively vulnerable to rate hikes. A somewhat conservative approach focusing on index funds is also advisable. More aggressive investors may consider a short-term strategy targeting technology and growth stocks that have experienced significant declines, setting clear profit targets.

'Embracing the bottom' refers to a strategy of dollar-cost averaging to position investments at market lows over the investment period. Given the still high market volatility and concerns about timing, it is advisable to invest in multiple installments or increase investments below certain indices or price levels. For extreme long-term investments such as installment pension assets, a more aggressive risk exposure centered on index investing may be necessary rather than excessive caution.

Bonds still seem to have a long way to go. For the time being, it is best to adopt a short-term approach by holding bonds to maturity with a maturity-matching investment strategy while watching for the right time to make a full swing. As the FOMC forecasted, the pace and duration of rate hikes are expected to peak by the first half of next year at the earliest. Both the 2-year and 10-year U.S. Treasury yields rose by more than 0.5 percentage points compared to last month, indicating that market interest rates have increased roughly in line with the benchmark rate hikes regardless of maturity.

If investing in bonds for mid-term trading rather than holding to maturity, investors should be prepared to endure significant unrealized losses for a considerable period, as an additional increase of more than 1 percentage point in benchmark rates is expected. It is advisable to invest in short-term bonds (government and high-quality corporate bonds) with maturities of around 3 to 6 months at yields higher than market rates until confidence in the peak of interest rates is established, then consider switching to individual long-term bonds (over 10 years) or funds investing in medium- to long-term bonds.

Since the impact of rapid rate hikes on the credit market remains uncertain, a cautious approach focusing on government bonds or high-quality corporate bonds is necessary. For domestic investments, attention may be given to bonds issued by bank holding company-affiliated financial institutions, special bonds such as those from Korea Electric Power Corporation, public enterprises, or high-quality corporate bonds.

Above all, always prioritize the nature of your funds, personal experience, and risk tolerance. Aggressive investors who can afford long-term investments with surplus funds should consider actively managing funds by focusing on recently declined stocks and other risky assets. Conservative and stable investors planning to use funds in the near term should manage their funds primarily through high-interest savings and time deposits.

Although another tunnel appears after a long tunnel, the end will come eventually. The reason for investing is a simple hope to live a happier and more prosperous life. By avoiding impatience and excessive greed and investing cautiously while embracing the upcoming market bottom, you will not repeat the frustration of missing multiple opportunities in the past.

Sungjung Kwon, Head of Gold PB, Club One PB Center, Hana Bank