As the interest rate cut phase gains traction, signs are emerging that stock investors' strategies are shifting. In a market that had been skewed toward growth stocks, the two keywords of "high dividends" and "low PBR" are expected to come back into focus.
In an interest rate cut environment, bonds lose appeal while dividend stocks relatively shine. On top of that, the gap between growth and value stocks has widened to a historical low, bolstering the analysis that attention could grow on undervalued value stocks.
After the U.S. benchmark rate was cut by 0.25% this month, market expectations are rising for the possibility of additional cuts. Jerome Powell, chair of the U.S. Federal Reserve (Fed), remains cautious, but some officials have made remarks supporting further rate cuts.
Federal Reserve Vice Chair Michelle Bowman said in a recent speech, "The labor market is weak, so we must act decisively to lower rates," adding, "Relying only on data is essentially looking backward." John Williams, president of the Federal Reserve Bank of New York, also said, "Monetary policy is still in a position to exert downward pressure on inflation," and "the Federal Reserve (Fed) now faces a balancing act and core inflation is easing," voicing support for additional rate cuts.
With concerns about an economic slowdown growing due to factors such as the downward revision of U.S. employment indicators, the view is gaining ground that the Fed could pull out additional cuts through early next year if necessary. If the rate-cutting trend lasts longer than expected, bond investors' real returns will shrink further, while the relative appeal of stocks with high dividend yields could stand out even more. In past easing cycles as well, high-dividend stocks often outperformed the market.
The concentration on growth stocks also supports the high-dividend, low-PBR strategy. Over the past 12 months in the domestic market, the performance gap between value and growth stocks was -16 percentage points, the lowest on record excluding the COVID-19 pandemic period. It shows how extreme the tilt toward growth stocks has become.
Kang Hyeon-gi, a researcher at DB Securities, said, "From this perspective, telecommunications services and steel are sectors to watch," adding, "Both sectors have the dual advantages of high dividends and low PBR, making them attractive in a low-rate era." Telecommunications services have a strong profile of stable dividends, while steel stands out for its undervaluation. The current price-to-book ratio (PBR) of Korea's steel sector is 0.36 times, near its historical lows. Given that the sector has repeatedly bottomed around a PBR of roughly 0.3 times and then rebounded, the possibility of a stock price rebound is being raised. With the external catalyst of China's steel industry restructuring also in play, investment appeal could strengthen further.
Kang said, "For investors seeking relatively higher returns, this perspective is worth attention," adding, "As buying interest has recently concentrated in UnitedHealth Group, classified as a value stock in the U.S. market, it is time to consider the potential for interest to shift to value stocks in the Korean market as well."