How are Korean asset owners preparing for inflation?
Pedestrians stand in front of the Sungnyemun city gate in central Seoul. (Yonhap)
The 14th Institutional Investor Week Korea, a virtual conference hosted by Hong Kong-based publication AsianInvestor from June 21 to 25, invited discussions on how Korean institutional investors are preparing for the possibility of rising inflation. and interest rates.
Historically low interest rates and aggressive monetary and fiscal stimulus packages not only cushioned the impact of the pandemic on the market, but also allowed investors to capitalize on the rapid recovery in prices of certain asset classes. , including listed shares.
The approach, however, seems unlikely to be sustainable as global financial policymakers begin to discuss policy standardization.
The eyes of Korean investors are fixed on how quickly this normalization will kick in, especially in response to inflation, which is likely to eat into listed company earnings and affect bond yields.
“If the central bank puts its policy normalization into practice sooner than the market expects, the decrease in liquidity will increase market volatility and have a ripple effect on risky assets,” David Park, director of investments of the only Korean sovereign fund, Korea Investment Corp. , said the conference.
Park added that KIC, which manages funds entrusted by the Korean government and central bank, is preparing a strategic rebalancing of the portfolio, based on its observation that the global economy will enter a boom phase from the third trimester.
The plan is to reduce KIC’s exposure to bonds and shift to non-traditional assets that are typically traded privately.
“KIC seeks to improve its risk-adjusted return by increasing its exposure to alternative assets, which are less correlated to the performance of traditional assets, in order to compensate for the low rate of return expected for exposure to bonds,” said Park, adding that he expects his current exposure to alternative assets – 16% of his total portfolio in May – to gradually increase.
Are alternative assets new safeguards against bubbles?
Park is among Korean investment professionals who are dissatisfied with low bond yields due to ultra-low rates.
The low interest rate environment has left bond investors struggling with low yields.
Long-term bonds, a traditional safe haven that tend to be more price sensitive and offer better investment opportunities in times of high volatility, have remained scarce. This means that relatively few investors have been able to position themselves to take advantage of a rebound in long-term bond yields in the event of a surge in inflation.
Instead, Korean bond investors have often ended up resorting to high yield bonds, quality emerging market corporate bonds, and leveraged loans to beat inflation.
Additionally, there are concerns that stocks and bonds will positively correlate with each other as the market normalizes, potentially robbing bonds of their traditional role of hedging against stocks.
Faced with such uncertainties, some investors have chosen to avoid traditional bond assets in the composition of their portfolios to protect themselves from the impact of market volatility.
Instead, they look for asset classes whose prices don’t move in tandem with stocks or bonds.
A promotional image from the 14th Institutional Investor Week Korea (AsianInvestor)
“In the wake of the low interest rate environment, we are gradually reducing exposure to bonds,” said Lee Kyu-hong, investment director of Teachers’ Pension of Korea.
“Rather, we seek to deal with high market volatility by increasing exposure to alternative assets, as their performance has a low correlation with that of traditional assets.”
Lee added that the move was part of the long-term rule-based asset allocation policy of the Teachers’ Pension, a public occupational pension fund, noting that it would refrain from executing responses to short term to immediate market downturns.
Insurance companies have been no exception to the trend, as rising rates translate into their imminent risks in the event of an asset-liability mismatch.
“Our focus on traditional assets such as stocks and bonds has shifted to private investment in assets such as infrastructure, real estate, private stocks, private debt, hedge funds or natural resources. “said Baek Song-ho, director of investments at Samsung Marine. & Fire insurance.
Baek added that the rebalancing aimed at security was underway, having acquired a top-notch office building in central Seoul in the first half of this year.
“In the interest of inflation protection, we continue to seek out iconic office buildings with long-term tenants. We are also looking to cooperate with overseas fund managers to gain exposure to infrastructure, real estate and private equity, ”Baek said.
However, not all Korean asset owners have a good outlook for real estate if QE ends.
Some other asset owners have argued that ending QE could burst a cash-backed real estate bubble.
Increased competition among proposed buyers of real estate assets pushed up the overall transaction price and created a bubble, Lee Jin-won, head of alternative investments at the Local Finance Association, told the hearing.
Lee said it was necessary to take a region-specific and sector-specific approach, and have a liquid investment strategy, to ensure bubble protection.
“Office assets are more immune to the risk of rising interest rates than logistics assets,” Lee said. “(The LFA) has started to focus on office buildings to protect against asset bubbles this year.”
To make its portfolio of real assets more liquid and act as a blockade against the bubble, the Association Finance Locale focused on a single investor agreement to refrain from a joint effort to pool capital with partners, in the form of co-financing. investment or club agreements, he added.
The strategy “will make it easier for (the LFA) to get out of the illiquid asset if a bubble bursts,” Lee said.
In addition, real estate investors can have more liquidity by turning to open-ended instruments for real estate investments, such as a listed real estate investment trust, said Kim Jung-su, chief analyst. investments in the Police Mutual Aid Association.
By Son Ji-hyoung ([email protected])