[PB Notebook] Interest Rate Cuts and Investment Strategies

Park Hyoseong, Head of Gold PB Team, PB Center Branch, Sales Division 1, Hana Bank

One of the frequently asked questions these days is, “Which direction will interest rates move in the future?” Various external factors influence interest rates in Korea. In addition to fundamental factors such as inflation and the economy, real estate regulations and the U.S. economic situation are also important variables.

If the U.S. implements an interest rate cut, Korea’s interest rates may also decline, but considering that we have already raised rates preemptively and the period of rate freeze has been long, the magnitude of the decline is expected to be relatively small. So, how should investment strategies be formulated in response to interest rate cuts? Generally, it is common knowledge that bond prices rise when interest rates fall, but it is necessary to examine why bond yields have recently moved differently from expectations.

Currently, it is indeed an appropriate time for bond investment. However, the problem is that the rate cut has already been priced in. In fact, even during periods of benchmark rate cuts, market interest rates fluctuate daily depending on the news. There was a case where bond yields surged sharply even after the significant rate cut in the U.S. last month.

In conclusion, the benchmark interest rate is only a target of monetary policy, and actual market interest rates are determined by the supply and demand of funds. Therefore, if bond yields have risen significantly in a short period, it is advisable to use a dollar-cost averaging strategy while paying close attention to the news.

Is an interest rate cut necessarily good news for the stock market? If the economic rebound is not clear, a conservative approach may be necessary. Adding dividend stocks to a portfolio currently concentrated on big tech is also a reasonable strategy. However, please invest from the perspective of securing a safe haven rather than seeking high returns. Crises can occur at any time. In a large-cap market trapped in a trading range, individual sector plays may become stronger. For long-term investors, it is better to take the opportunity to invest gradually in undervalued stocks.

Recommended sectors include the long-neglected bio and healthcare fields, which move inversely to interest rate cuts. This sector is gaining momentum in the second half of the year, and factors such as accelerated aging, U.S. biosecurity law issues, and positive announcements from domestic biotech companies suggest ample room for further growth. Investing in bio healthcare exchange-traded funds (ETFs) may be more stable than individual stocks.

For next year’s market, it is best to maintain a balanced portfolio of stocks, bonds, gold, and the dollar. The U.S. stock market appears to have the highest investment attractiveness next year. With the U.S. implementing interest rate cuts, an economic expansion phase is expected, and after the presidential election, government-led growth in the profits of the U.S. large tech stocks M7 is likely to continue. The reason the U.S. economy is stronger than other countries is that its industrial structure is rapidly changing. Consider diversifying investments into bio healthcare as well.

Park Hyoseong, Head of Gold (Gold) PB Team, PB Center Branch, Sales Division 1, Hana Bank