Lee Hye-na expects stocks and bonds to rise after US midterm elections

Lee Hye-na, CEO of Promus Financial Academy, predicts a simultaneous rise in stocks and a fall in bond yields following the US midterm elections. She noted that a divided government could cause the 10-year Treasury yield to fall by approximately 60bp in the six months following the elections.

Analysis suggests that the South Korean stock market has entered an undervalued zone comparable to levels seen during financial crises. In particular, political variables following the results of the US midterm elections could serve as a catalyst to drive bond yields down and lead to a rise in the stock market.

In a dialogue with The Man Who Explains the Economy (Kim Kwang-seok TV), Lee Hye-na, CEO of Promus Financial Academy, provided an in-depth discussion on the current undervalued market conditions and investment strategies by asset class. Lee diagnosed the current South Korean stock market as significantly undervalued, emphasizing the mid-to-long-term merits of the domestic market, which includes promising sectors such as memory semiconductors, defense, secondary batteries, and robotics.

"5.3% Treasury yield is a 20-year high... the right time to buy bonds"

Despite recent volatility, Lee highly evaluated the attractiveness of bond investment. This is because, while the exchange rate has stabilized in the 1,320 won range, Treasury yields remain high, exceeding 5%.

"While Treasury yields hit a peak of 5.3% and are currently declining slightly, this figure itself is at its highest level in 20 years," Lee analyzed. "Considering the long-term average range, it is a price level with sufficient mid-to-long-term merit."

Lee also revealed her personal investment formula based on the 10-year Treasury yield. She explained that she has continued investing by repeating a method of buying in the 4.5% range and selling when it falls below the low 4% range, noting that current interest rate levels are within a sufficiently attractive range for the long term.

In particular, Lee identified the US midterm elections as the key variable that will determine the future direction of interest rates. "Historically, when a 'divided government' is inaugurated—where the President and the majority party in Congress are different—the 10-year Treasury yield has tended to fall by approximately 60bp (0.6%p) in the six months following the midterm elections," she explained. As betting sites such as Polymarket and Kalshi are currently placing weight on the possibility of a divided government, Lee argued that if a divided government materializes, it could limit expansionary fiscal policies, such as Trump's tax cut policies, thereby increasing downward pressure on interest rates.

This outlook for falling interest rates is expected to act as a positive signal for the stock market as well. "There has been a statistical trend where the stock market shows an upward direction in units of three months, six months, and one year after the midterm elections," Lee said. "In the current situation where bond yields are staying at the upper limit, I expect a 'simultaneous rise' trend to appear, where bond yields fall and stock prices rise after the midterm elections."

Reason for preferring US Treasuries: 'Harmony of exchange gains and interest income'

Regarding global asset allocation, Lee presented a strategy of most preferring US Treasuries. It is Lee's judgment that not only the United States but also the government bonds of Europe, Japan, and South Korea have entered attractive ranges. While global bond yields are fluctuating—for instance, in France, where yields have stabilized after soaring while credit ratings were maintained—Lee prioritized US Treasuries. This is because holding US Treasuries allows one to expect interest income and capital gains, as well as "exchange gains."

Lee stated, "Since the current exchange rate has dropped to the 1,320 won range, there is investment merit in terms of the exchange rate as well." While the value of the Korean won is being supported by the process of domestic semiconductor companies converting foreign currency earnings into won, Lee analyzed that holding US Treasuries remains valid considering the possibility of a slowdown in semiconductor growth and the exchange rate outlook for next year (low in the first half, high in the second half). In particular, she cited a report from Shinhan Securities as evidence that the exchange rate is highly likely to rise in the second half of next year.

Geopolitical risks and volatility warnings

However, she cautioned against volatility caused by geopolitical risks. If conflicts in the Middle East continue, there remains room for bond yields to rebound. "It is also uncertain whether a meaningful agreement can be reached between the United States and Iran," Lee noted, adding, "In the short term, there could be additional rises in interest rates."

Nevertheless, Lee maintained a mid-to-long-term perspective. "If one keeps their vision open until around the second half of 2027, I think it could be quite good when considering the exchange rate, bond trading gains, and interest income from historically high interest rates," she added. This judgment takes into account that even if high oil prices persist, the inflation rate may gradually slow down.

Lee concluded the dialogue by emphasizing that it is important for investors to make decisions based on market trends and specific data by asset class, rather than simply focusing on mindset.

Source: original video (YouTube)