The Bank of Korea has raised its base rate to 3.0% and signaled the possibility of further increases. Analysts say individual investors need to shift their portfolios to suit a higher-rate environment. Investors who built up holdings in stocks and real estate on the assumption of low rates and rising asset prices should re-examine the role of cash-equivalent assets and bonds, and cut exposure to overvalued growth stocks and heavily indebted companies.
Han Chang-hoon, chief strategy officer at the management strategy division of Woori Asset Management, is a specialist in product analysis and asset allocation strategy. He sees the current moment — with the base rate rising and the won-dollar exchange rate falling at the same time — as a rebalancing opportunity to hold both domestic safe assets and high-quality overseas assets.
Put 30-40% in Cash Equivalents, and Keep Deposit Terms Short
In a rising-rate environment, investors should start by recalculating their portfolio's expected return. During the era of low rates, the "TINA" mindset — There Is No Alternative — held that nothing beyond stocks and real estate was worth considering. Now, deposits alone can be expected to yield interest of 3% to 4% a year.
"You have to apply a stricter test to risk assets, asking whether the expected return justifies the risk of losing principal," Han said. "In an environment where time deposits alone can generate a certain return, stocks and real estate need expected returns of at least 6% to 7% a year to be worth the investment."
For investors carrying debt, prioritizing repayment over investment can also be a valid strategy. "If your loan rate is somewhere between 5% and 8% a year, it is hard to find an asset investment that will outrun the interest piling up," Han said. "Cutting interest costs is more advantageous in terms of a guaranteed after-tax return."
He suggested raising safe assets to as much as 30% to 40% of total financial assets. Retirees, he said, would do well to keep more than 50% in deposits and cash equivalents. But with the possibility of further base rate increases still on the table, he said a short-term, split approach remains valid even when putting money into deposits.
"Keep 30% of your cash-equivalent assets in short-term liquidity products such as money market funds, and split the remaining 70% across three-month, six-month and one-year terms — a deposit ladder strategy," Han said. Maturities then come due in sequence, allowing the portfolio to capture higher market rates as they arrive. Once there are clear signs that rates have peaked, he recommended rolling into two- to three-year deposits to lock in the higher yields.
Start With Short-Dated Bonds, and Favor Financials and Dividend Payers Over Growth Stocks
When rates rise, bond prices fall, which can widen valuation losses at bond funds and exchange-traded funds that mark their holdings to market. Still, understanding the characteristics of the products held and their maturity structure — that is, duration — allows investors to manage losses while preparing for the next opportunity.
Investors already sitting on losses in bond funds need rebalancing tailored to their holdings rather than a blanket sell-off. "If you hold long-dated bond funds, you can build a structure that guards against further losses by shifting some of the money into low-volatility short-term bond funds or MMFs until the rate-hike phase runs its course," Han said.
Investors with accumulated losses may want to consider buying in tranches to lower their average purchase price, once there are confirmed signs the base rate has peaked. If the cycle then turns toward rate cuts, rising bond prices would add to returns and speed the recovery of principal.
For first-time investors in bond products, a two-stage strategy — starting with short-dated bonds and moving to longer maturities — works well. "While rates are rising, I recommend securing interest income mainly through ultra-short-term bond funds or ETFs, where price volatility is low, and then increasing exposure to long-term government bond funds and ETFs once expectations of a rate peak and subsequent cuts become clear," Han said. That approach locks in high yields while positioning for capital gains from rising bond prices when rates fall.
In the equity market, investors should apply a stricter test to the financial soundness of individual companies. When funding costs jump quickly, heavily indebted marginal firms — those whose operating profit cannot even cover interest costs — tend to feel the squeeze first. Overvalued growth stocks whose earnings do not support expectations of future growth are also likely to take a direct hit from higher discount rates.
"Heavily indebted companies and overvalued growth stocks should be the first things you check in a portfolio to reduce downside risk," Han said. "Rather than individual stocks, it is better to diversify through indirect vehicles such as financial-sector or dividend funds and sector ETFs." Among the alternatives cited are bank stocks, which stand to see net interest margins improve as rates rise; high-dividend value stocks with strong cash generation; and products focused on high-quality companies able to pass price increases on to consumers.
60% Domestic, 40% Overseas — Unhedged for Stocks, Hedged for Bonds
Domestic interest rates are climbing while the won-dollar exchange rate has fallen to the 1,300-won range. In Korea, deposits and high-grade corporate bonds have become more attractive on yield, while overseas assets have become cheaper to buy in won terms. "I recommend an allocation of 60% domestic assets and 40% overseas assets," Han said.
For the domestic portion, he advised building a safe zone for a high-rate period using time deposits, high-grade corporate bonds and financial and high-dividend funds. He said the overseas portion would be a particular opportunity for investors who had put off entering the market because of the burden of a high exchange rate.
Among foreign equities, the U.S. 10-year Treasury yield has reached about 4.8%, increasing the discount-rate burden on high-valuation stocks such as the tech-heavy Nasdaq. "Rather than concentrating too heavily on growth stocks, investors need to take a conservative approach through index products diversified across a range of industries, such as the S&P 500, or dividend value funds," Han said. At the same time, given that U.S. bonds have become far more attractive, he said it is also valid to include funds that invest in short-term U.S. Treasurys and in initial public offerings, pursuing interest income and risk diversification at once.
Currency strategy should be divided according to the nature of the asset. For foreign stocks and ETFs, Han said unhedged products are appropriate. "In crisis phases when global equity markets tumble, the dollar often strengthens, so currency gains can partly cushion losses from falling share prices," he said.
Foreign bonds, by contrast, are best held in currency-hedged form as a matter of principle. "Bonds are by nature assets meant to deliver stable interest income and limit price swings," Han said. "If you are counting on a bond return of 4% to 5% a year and the exchange rate falls 5% to 10%, leaving you with a currency loss, the very purpose of the investment is undermined." He added: "Stocks should be left unhedged to build resilience in a crisis, and bonds should be hedged to protect interest income. The role of each asset has to be clear."
"Jung Ji-won's Money Trace" is a column that tracks investment flows through wealth management specialists in the financial industry. It examines where money moves as markets change and how investors allocate their assets.
