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'Take risk, diversify a bit more in bonds next year'

AllianceBernstein (AB) Korea CEO Lee Chang-hyun, left, and Yoo Jae-heung, AB senior portfolio manager, present an overview of the 2018 bond market at a press conference in Seoul, Wednesday. / Courtesy of AB Korea

By Park Hyong-ki

Next year, the global economy is forecast to grow 3 percent with the balance of the world's growth shifting more toward Europe as the continent, minus Britain, is heading for recovery.

This follows three to four years of global growth led by the United States, which will continue to see upward momentum now that it has recently passed a bill giving huge corporate tax cuts, with its unemployment at a record low.

With positive outlooks abroad, there will be some inflationary pressure next year.

This may not be good news especially for investors in fixed-income securities, given that traditionally and theoretically bonds and inflation backed by growth do not go well together.

But AllianceBernstein (AB), a global asset manager based in New York, recommends retail investors to keep holding onto their bonds.

They can have their portfolios more exposed to high-yield bonds, including junk bonds and sizeable bonds not credited by rating agencies, if they can bear more risks for higher returns of between 2 to 3 percent a year.

Also, investors should consider emerging market bonds for their portfolios, in addition to putting more weight on European bonds.

Yoo Jae-heung, AB Korea's senior investment manager, said the key thing for 2018 is keeping retail portfolios more "selective with diversity," meaning people should not put every penny into one single market such as the U.S.

Also, he told the press in Seoul that investors should keep watch of central banks around the world concerning their future monetary policies, especially of the U.S. Federal Reserve, and use their hints and signals as references and leverage to adjust their portfolios.

"The biggest factor would, of course, include the North Korean nuclear issue for the global community. But also, the question remains how much the Fed will be aggressive with its monetary policy," Yoo said.

AB forecast two more federal rate hikes in the first half of next year.

Will this steady rise affect emerging markets and ignite concerns of capital flight out of the region?

Yoo said no, showing AB's graphic data, because the Fed's rate hike did little to shake and rattle emerging markets over the past year.

This indicates that their responses and countermeasures to the Fed have significantly improved, which backs up its recommendations to buy emerging market bonds, he added.

But for average investors, the best recommendation AB could give would be dividing the exposure equally to risk-free state bonds or treasuries and high-yield bonds.

Global growth is clearly there, but Yoo reiterated the importance of pursuing investment via a multimarket strategy.

Another important note is not to expect to gain just by investing in high-yield or state bonds within six months to a year.

Yoo said Korean retail investors tend to be impatient and expect faster and quicker returns.

But in reality, this is next to impossible, he said, adding they incur more transactions costs than reaping gains by pulling out of their investments after failing to see returns they wanted in the short term.

He stressed there are "no shortcuts" to building wealth. Investment involves strategic moves of long-term perspective and diversification.

AB is significant in the bond market especially in managing high-yield bonds globally.

This year, AB Korea celebrated its 10th anniversary.

Park Hyong-ki

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