As U.S. Government Bonds yields soar, pressure on the stock market is growing. Which corporations should investors pick to invest in stocks in a high-rate environment?
Hana Securities advised focusing on corporations that can raise return on equity (ROE) through shareholder returns when rates are rising, and on corporations that lift return on assets (ROA) by using asset efficiently when rates stay high.
According to Investing.com on the 25th, the previous day the U.S. Government Bonds 10-year yield closed at 4.7%, down 3.7 basis points from the prior session (1 bp = 0.01 percentage point). The Government Bonds yield, which was around 4.4% in early July, kept rising and surpassed 4.7%. The U.S. Government Bonds 30-year yield also continued to rise after July and topped 5.2%.
Rising rates weigh on stocks. They increase corporations' funding expense while lowering the present value of future profits, raising the discount rate on stocks. The recent climb in U.S. Government Bonds yields stems from concern that issuance will rise as the U.S. fiscal deficit widens, compounded by increased corporate bond sales by artificial intelligence (AI) big tech companies.
In particular, higher U.S. Government Bonds yields spur foreign capital outflows and a weaker won, weighing on the Korean stock market. If the rate gap with the United States widens, the Bank of Korea may raise the benchmark rate or keep a high-rate stance for an extended period.
On the 19th, when news broke that the U.S. Government Bonds yield had exceeded 5.33%, the highest since 2007, the KOSPI plunged 5.8%.
Advice is to concentrate on corporations with high ROE during rate-hike periods. ROE shows how much profit a corporation generated using its equity capital. It is ROA multiplied by the financial leverage ratio.
In particular, in a phase of rising rates, uncertainty about future profit growth increases, so it said to focus on corporations that raise ROE through shareholder returns rather than investment.
Lee Jae-man of Hana Securities said, "In a phase when market rates are rising, trust in profit growth is not high, so stocks of corporations that will raise their financial leverage ratio do well." Among domestic corporations, as with Samsung Electronics(005930) and SK hynix(000660), he suggested Kia, LG, Hyundai Glovis, and GS Holdings as names to watch that can use strong free cash flow for dividends or share buybacks.
By contrast, when rates remain high, whether ROA improves becomes more important. In this period, investors' attention shifts to corporations' profit growth and investment efficiency. ROA, net income divided by total assets, shows how efficiently a corporation uses the assets it holds to generate profit.
A representative overseas corporation with high ROA is 엔비디아. Nvidia's equity investments totaled $66.9 billion over the past four quarters, exceeding the $47 billion in dividends and share buybacks. If investments in the AI value chain and infrastructure corporations lead to future profit growth, the analysis is that it can maintain high levels of ROA and ROE.
Among domestic corporations, those expected to post high ROA this year include Samsung Electro-Mechanics (10%), Naver (4.6%), LG Electronics (4%), LS Electric (9.9%), Hyosung Heavy Industries (9.9%), HANMI Semiconductor (36.9%), ISU Petasys (18.7%), LG CNS (8.7%), and LG Innotek (7.3%).