How do Korean asset owners brace for inflation?
Pedestrians stand in front of the city gate Sungnyemun in central Seoul. (Yonhap)  As global central banks talk pf tapering the huge liquidity provisions they made to cope with the fallout from the COVID-19 pandemic, South Korean asset owners are rethinking their current asset allocation strategies. The 14th Institutional Investor Week Korea, a virtual conference hosted by Hong Kong-based publication AsianInvestor from June 21-25, invited discussions of how Korean institutional investors were preparing for the possibility of increased inflation and interest rate hikes. Historically low interest rates and aggressive monetary and fiscal stimulus packages not only cushioned the market impact from the pandemic, but also allowed investors to capitalize on the swift price recovery of certain asset classes, including listed stocks. The approach, however, appears unlikely to be sustainable as global financial policymakers begin to discuss policy normalization. Korean investors eyes are fixed on how early that normalization comes into place, particularly in response to inflation, which is likely to chip away at the earnings of listed companies and affect bond yields. If the central bank puts policy normalization into practice earlier than the market expects, the shrinking liquidity will widen the market volatility and have a spillover effect on risky assets, David Park, chief investment officer of Koreas sole sovereign wealth fund Korea Investment Corp., told the conference. Park added that the KIC, which manages funds entrusted by Koreas government and central bank, was laying out a strategic portfolio rebalancing, based on his observation that the global economy would be entering an expansionary phase starting from the third quarter. The plan entails cutting the KICs exposure to bonds and turning to nontraditional assets that are usually traded privately. KIC seeks to enhance its risk-adjusted return by raising its exposure to alternative assets, which is less correlated to the performance of traditional assets, in order to offset the low expected rate of return for bond exposure, Park said, adding that he expected its current exposure to alternative assets -- 16 percent of its total portfolio as of May -- to grow gradually. Park is among the Korean investment professionals who are dissatisfied with low bond yields due to ultralow rates. The low-rate environment has left bond investors struggling with low returns. Long-term bonds, a traditional safe haven that tends to have higher price sensitivity and offer better investment opportunities during times of high volatility, have remained scarce. This means relatively few investors have been able to position themselves to take advantage of a rebound in long-term bond yield in case of a surge in inflation. Instead, Korean bond investors have often ended up resorting to high-yield bonds, emerging market investment-grade corporate bonds and leveraged loans to beat inflation. Moreover, there are worries that stocks and bonds might positively correlate with one another as the market normalizes, which could deprive bonds of their traditional role as a hedge against stocks. Amid such uncertainties, some investors chose to shun traditional bond assets in their portfolio mix to protect themselves from the impact of market volatility. Instead, they are searching for asset classes whose prices do not move in tandem with either stocks or bonds. A promotional image of the 14th Institutional Investor Week Korea (AsianInvestor)