Investments in a low interest era

Cuts in the benchmark interest rate over the past few months have led to an increase in money in search of higher returns. According to the Korea Financial Investment Association, short-term floating funds reached a total of 800.726 trillion won ($710 billion) as of January, and that figure is likely to rise after last week’s cut brought interest rates to a historic low.

For investors who are still searching for new places to invest, the JoongAng Ilbo asked a group of investment analysts for tips in an era of low rates. They all shared a similar piece of advice: “Watch exporters, because they will benefit from low interest rates. For a long-term strategy, pay attention to companies’ dividends under the government’s dividends expansion policy.”

Potential candidates for short-term investment are companies that will benefit from a won that weakens due to the fall in local interest rates. So far, a weaker won has given many companies opportunities to rebound, as it increases the price competitiveness of Korean products. Last year, the won weakened against the yen, benefitting Korean oil companies, semiconductor manufacturers and automobile makers who compete with the Japanese.

Kim Ji-un, an analyst at Shinhan Investment Corporation, said he believes semiconductor makers will become rising stars on the stock market.

“The profits of Korean semiconductor manufacturers, who currently dominate worldwide markets, will jump significantly,” Kim said. “The weak won will accelerate their price competitiveness, so they will become a magnet for investment. I’m thinking of Samsung Electronics, SK Hynix and Hanmi Semiconductor,” which sells semiconductor manufacturing equipment.

Construction and securities companies will also benefit from the rate cuts, because housing sales and securities transactions are sensitive to interest rates.

“In general, until the benchmark rate is raised, housing sales and securities transactions are expected to rise,” Lee Jae-man, an analyst at Hana Daetoo Securities, said.

For a long-term perspective, analysts recommend investments that will yield healthy dividends.

“Following the rate cuts, deposit rates at local banks will drop,” said Kim of Shinhan Investment Corporation. “We need to pay attention to some stock that offer high dividends instead of deposits at banks.”

“The current level of dividends on Korean stocks is only 1.1 percent, almost the lowest in the world,” said Lee of Hana Daetwoo Securities. “But if the government levies taxes on companies’ cash reserves, the dividend rate could rise to more than 1.5 percent overall this year.”

Increased profits for Korean companies could also translate into higher dividend yields, analysts said.

“Profits of Korean companies are expected to rise amid falling oil prices and the weaker won,” Lee said. “The average dividend payout of Korean companies is expected to rise to 1,061 won per share this year, increasing 8 percent from last year.”

Analysts at KB Investment and Securities recommended 43 companies for investment. They expect them to offer more than 2 percent of their shares’ value on a specified date in dividends. Those 43 companies accounted for about 30 percent of the all Korean companies with more than 1 trillion won in market capitalization.

The top of the list was occupied by Hite Jinro, a liquor producer, with an expected dividend payout ratio of 4.99 percent. It was followed by Korea Electric Power Corporation, or Kepco (4.68 percent); Industrial Bank of Korea (3.77 percent); and Grand Korea Leisure (3.66 percent).

Shinhan Investment Corporation also recommended Hite Jinro and IBK, GKL for dividends. Samsung Securities chose some companies in the utilities and telecommunication sectors, such as Kepco and SK Telecom.

For investors looking for safer assets than equities, bond-type funds are popular amid low interest rates, according to the Fund Doctor, a fund analysis provider.

Bond funds have steadily drawn money from investors as they seek stable investment in a sagging economy and a tepid stock market.

According to the Financial Investment Association, total investment in securities funds shrank by 6.6 trillion won in 2014, while investment in domestic bond funds grew by 13.6 trillion won.

“The unprecedentedly low interest rates and Finance Minister [Choi Kyung-hwan]’s comment on boosting the economy have a positive impact on the bond market,” Jang Dong-hyeon, a fund analyst, said in a report dated March 13. “Amid a rebounding bond market, the bond fund market recorded 0.16 percent yield on average this week.”

“Intermediate-term bond funds recorded the highest yield, 0.20 percent, among all of bond-related funds,” Jang said. “Meanwhile, short-term bond funds and [money market funds] saw low yields, 0.10 percent and 0.04 percent respectively.”

BY YEOM JI-HYUN, KIM HEE-JIN [kim.heejin@joongang.co.kr]