Big ears won’t help
The Korean economy is sinking deeper into the ultra-low interest rate pit. The market is already anticipating another rate action by the Bank of Korea following its first cut in 15 months in August. If the central bank brings the key interest rate down by another quarter of a percentage point, the base interest rate will be at a low of 2 percent last seen in February 2009 during the global financial crisis. Inflation slipped to a seven-month low of 1.1 percent in September. Choi Kyung-hwan, deputy prime minister for the economy and finance minister, sent a verbal message to the Bank of Korea, which meets on Oct. 15 for a monetary policy decision, commenting that South Korea may be on the doorstep of a deflationary cycle.
Financial consumers are bewildered at such an unfamiliar capital environment. Financial institutions are courting them to take out their bank savings to invest in hybrid products like stock funds or equity-linked securities. Data shows shifts in capital flows. But higher returns require risk taking.
If you are worried about losing your savings, you better leave them in the bank, even if they hardly yield returns. Some may choose to lock their money in a safe because they are annoyed at such pitiful returns. In fact, safes have been popular among the Japanese, who are used to zero interest rates. Similar signs are appearing in Korea these days. About 70 percent of the 50,000 won ($47) notes have not returned to banks, and manufacturers of home safes are enjoying revenue growth.
Here are some investment tips for slightly less conservative financial consumers. First of all, you should divide family cash assets into three groups and put them in different products for risk management. Money set aside for high-risk investments could go into stock or equity-linked funds. There are also funds that invest in real estate or raw materials.
Some may have bitter memories of stock or fund investments. But one must study the reasons for past failures. You may have placed your money on the advice of staff at financial institutions upon hearing someone having earned money from stocks. We usually go around several shops to compare when we shop for a bag or a pair of shoes. Stock and fund shopping also requires such study and perseverance. There are luxury brands among equities and funds too. Even as the economy has lost steam and the Korean composite stock index remains stagnant, there are 50 to 100 blue chips among the 3,000 listed companies. Cosmetics producer Amore Pacific and portal site Naver recently gained big time. You could share their success if you become their stockholder.
If you are not sure about what to choose, you could consider safer funds arranged by credible asset managers. There are notable fund managers that have guaranteed average 10 percent returns for the last 10 years. Reliable names are Kang Bang-cheon, Huh Nam-kwon, Lee Chae-won, Choi Jun-cheol and Suh Jae-hyung. They are experts in straining out pearls from mud and packaging them for a few selective lucrative investment vehicles. They are different from fast-food dealers that offer tens or hundreds of funds on their menu.
If you do not trust Korean companies, you could invest in overseas blue chips. The world market is immense. Most valuable companies like Apple and Google as well as recent hot stock Alibaba can be yours after a short tour of the Internet and a few mouse clicks.
For second-tier capital, ESL or sure-guaranty hedge funds are the best leverage option. Money has already been moving in that direction. ELS have sold 8 trillion won in September and its balance has reached over 50 trillion won. Unless underlying stocks or composite index halve in value, the products are designed to guarantee returns of 6 percent to 8 percent per annum. They are the best bet now.
For safety, the third group of capital should be placed in bonds that can be easily cashed out. They could be set aside for emergency funds. They still offer higher returns than bank deposits. The level of money in each section depends on your investment philosophy.
To make money in an ultra-low interest rate period, you must be more watchful and diligent. Having big ears won’t help.
JoongAng Ilbo, Oct. 2, Page 36
*The author is the head of the Economist, a weekly business news magazine published by the JoongAng Ilbo and the Korean edition of Forbes.
by Kim Kwang-ki