In a High-Rate Era That Feels Like a Tightrope Walk, Which Stocks Should Investors Watch Besides Samsung Electronics and SK hynix?

[Financial News] Analysts say investors should focus on companies that can boost return on equity (ROE) by increasing shareholder returns during a period when global government bond yields have surged to record highs. As rising bond yields raise questions about equity investing, companies that use cash for share buybacks and higher dividends may receive stronger market evaluations.
Lee Jae-man, an analyst at Hana Securities, said in a report on the 24th that "in a rising-rate environment, the market prefers higher financial leverage through shareholder returns rather than investment for growth."
ROE is calculated by multiplying return on assets (ROA), which shows how much profit a company generates from its assets, by the financial leverage ratio, which is total assets divided by equity. In a rising-rate environment, confidence in profit growth tends to weaken, so increasing financial leverage can be more favorable for market valuation, the report said.
In particular, companies that focused on expanding shareholder returns saw stronger stock performance as their financial leverage ratios rose. Increasing dividends or share buybacks can reduce equity and, in turn, raise financial leverage.
Over the past four quarters, Alphabet Inc., the parent company of Google, and Apple Inc. used capital of $229.2 billion and $109.7 billion, respectively. Alphabet spent 88% of that on facilities and equity investments, while Apple allocated 89% to dividends and share buybacks. Since the end of June, Alphabet has fallen 4%, while Apple has risen 7%.
Lee explained that "during the Fed's additional two rate hikes from March to October 2023 and the period of rising 10-year government bond yields, the average stock return of the top three sectors in the S&P 500 by ROE gains was 10%, far higher than the bottom three sectors, which fell 5%." He added that "in a high-rate environment, whether a company's efficiency, or ROE, improves affects stock returns."
For the domestic market, he argued that investors should look at companies that can use excess cash to expand dividends and share buybacks. Samsung Electronics, SK hynix, Kia Corporation, LG Group, Hyundai Glovis, and GS Group were cited as possible candidates.
However, he said that once rates reach a plateau and stop rising, profit momentum indicators such as ROA become important again. From November 2023 to August 2024, the Fed kept its benchmark rate unchanged while high rates persisted, but sectors with rising ROA posted an average stock return of 35%, above the 26% average for sectors with declining ROA.
He added that if the U.S. 10-year Treasury note yield does not break above its recent peak, investors should respond in the fourth quarter by focusing on companies that still have room for ROA improvement.
Lee said that "after the Fed's Jackson Hole meeting, which begins on the 27th local time, investors should check whether the U.S. 10-year Treasury yield breaks above its recent high." He added that "if it does not, it may be effective to increase exposure to AI value chain and infrastructure-related companies that have strong expectations for ROE gains based on ROA improvement."
[email protected] Lim Sang-hyeok Reporter