Winter of discontent

The year started off with a tailspin in the stock market due to bombshell news from China, where the central bank tried to deal with disappointing growth data by devaluing the yuan. On the first and third trading days of the year, the Chinese bourse crashed more than 7 percent. The rout in Chinese equities wreaked havoc on markets around the world, wiping out 5 quadrillion won ($4.16 trillion) in market valuation in just the first week of the new year.

And that was just the year’s beginning. Goldman Sachs predicts Chinese shares will lose more than 30 percent this year. The U.S. stock market, which enjoyed a bull run since 2009, ended last year mostly flat. Multinational hedge funds delivered negative returns last year.

There are few investors who say they have made money these days. In addition to the volatile stock market, funds invested in commodities and derivatives linked to crude lost 80 percent of their original value due to the freefall in oil prices.

High-yield bond prices are also tumbling amid a liquidity crunch after the U.S. Federal Reserve shifted to a tightening cycle and raised the benchmark interest rate. Investors in high-yielding government bonds of Brazil and Russia saw a third of their principle go down the drain due to foreign exchange losses. Hedge funds invested overseas are vanishing from the market. One global private equity player that boasted annual returns of 18 percent on average for the last two decades closed up completely early this year.

Parking money has become trickier amid lurking deflationary signs and ultra-low interest rates. Nearly a decade has passed since the global economy was hit with the worst crisis since the Great Depression because of the Wall Street-triggered meltdown in 2008.

The crisis has been contagious, jumping from the United States to Europe and now to China and emerging economies. We’ve discovered who was swimming naked when the colossal tide of easy liquidity was unleashed through the U.S. bond-purchase program and the dubbed quantitative easing ebbed, to paraphrase the words of Warren Buffett. Energy export-reliant and debt-ridden emerging economies are struggling. China is forced to streamline overcapacity and restructure its economy as the result of over-investment. The lights are flickering at the world’s factory.

Korea enjoys its highest-ever credit rating after Moody’s Investors Service last month upgraded its rating to the third-highest ranking of Aa2, but its economy is hardly doing well. Korean companies are being chased by Chinese rivals in technology and losing against Japanese competitors in price competition due to a weak yen. The areas of overcapacity that China needs to restructure are mostly Korea’s mainstream industries.

Overseas conditions are equally challenging. The capital markets are unstable and unpredictable because of contrary interest rate policies around the world. While European countries keep to ultra-low interest rates, the United States and some others are raising theirs. Volatility in stocks and derivatives has widened as they are used as leverage against foreign exchange investments. Geopolitical risks and a range of political factors like the Saudi Arabia-Iran conflict, a power struggle between the United States and China over military and economic issues, and an entirely unpredictable Russian government also make investment decisions purely on economic and corporate analysis difficult.

The best investment policy during such tumultuous times is sticking to basics. First, invest in safe options - high-yield bonds, blue-chip stocks and safer reserve currencies. Lower your expectations on returns as it is unrealistic to hope for high returns when the base interest rates remain so low. Invest in cashable assets: dividends or preferred shares are good options. One can be burned by parking money in assets that do not generate cash yields. Lastly, there is no need to be too fearful of volatility. Seek expert advice to use the volatility for long-term investments.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Jan. 26, Page B8

The author is the chairman of the Korea Federation of Banks.

by Ha Yung-ku