US Interest Rate Hike Signal: List of High-Debt Large-Cap Stocks to Watch Out For

As the US Federal Reserve emerged from a long slumber to abruptly raise its benchmark interest rate, a strong wave of tightening has swept through the securities market. It is a time when the sighs of investors who had patiently held onto large-cap stocks, driven by the vague belief that prices would eventually rise, are growing deeper. Shockingly, a large number of distressed large-cap companies have been discovered that have failed to even cover their loan interest payments with their operating profits over the past three years. In periods of steep interest rate hikes, companies that fail to deliver solid performance while carrying heavy debt tend to collapse first. In this article, we will thoroughly examine the reality of dangerous stocks that require special caution amid the wave of rising rates. We will clearly outline the market conditions where investors who blindly trusted the “large-cap” label are likely to suffer significant losses.

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US Interest Rate Hike Signal: List of High-Debt Large-Cap Stocks to Watch Out For

1. The Start of the US Federal Reserve’s Interest Rate Hikes

The US Federal Reserve has finally raised its benchmark interest rate after navigating a long tunnel of tightening, putting global financial markets on edge. Analysis of the recently released dot plot suggests a very high probability of additional rate hikes by the end of the year. Immediately following the conclusion of the Federal Open Market Committee’s regular meeting, market participants are expecting the year-end benchmark rate to reach a significantly high level. Compared to just one week ago, there is much more weight behind the forecast that interest rates will climb even more steeply. With inflationary pressures still failing to subside, hawkish remarks are pouring out from monetary authorities. This massive shift in monetary policy is not just a US issue; it will immediately hit the domestic stock market and loan market. For investors who have been clinging to a “wait and see” strategy while longing for the era of low interest rates, this news is a shock. When benchmark rates rise, the interest costs that companies must pay monthly on their borrowed money are bound to snowball. In particular, marginal companies that fail to generate proper revenue from their core businesses lose the ability to service interest and are pushed to the brink of collapse in an instant. Therefore, as the interest rate hike cycle fully kicks in, it is wise to conduct a major review of one’s investment portfolio.

2. Pressure for Additional Rate Hikes by the Bank of Korea

As the US activates its interest rate hike scenario, the Bank of Korea faces pressure to raise its benchmark rate further. Concerns about capital outflows are growing as the interest rate gap between the US and Korea widens again. Looking at the domestic economy, inflationary pressures remain strong, deepening the monetary authority’s dilemma. The central bank recently warned in a policy report that the surge in nominal growth rate is increasing demand-side price pressures. Given the precedent of consecutive rate hikes, the possibility of additional tightening measures remains open. Both ordinary citizens and companies are crying out that the interest burden from soaring loan rates has exceeded critical levels. Companies that have been running their businesses with borrowed money from commercial banks are in a state where their management activities are paralyzed due to the burden of increased interest. As long as inflation is not under control, monetary authorities cannot easily lower rates, so the pain of high interest rates is expected to continue for the time being. In this macroeconomic environment, companies with abnormally high debt ratios must worry about survival rather than stock price recovery. Investors should not be distracted by growth themes alone but must rigorously scrutinize how solid a company’s actual financial health is.

3. Large-Cap Stocks That Couldn’t Pay Interest for Three Years

A thorough analysis of KOSPI large-cap stocks using securities information providers and various data platforms has revealed shocking facts. A significant number of distressed large-cap companies were found that have never fully covered their loan interest with operating profits in the past three years. An interest coverage ratio of less than 1.0 means that the interest a company must pay to banks exceeds the money it earns from its core business. We filtered for stocks where the proportion of interest-bearing debt in total assets significantly exceeds 30%. Among general manufacturing and distribution large-cap stocks, excluding financial companies and holding companies, there are entities that meet all these conditions. This highlights how dangerous the public belief is that the “large-cap” title in the stock market guarantees safety. Many investors have endured for years, believing that stock prices would eventually return to their original levels riding a thematic wave, but the actual performance is dismal. While operating losses accumulated, debt grew, and many companies are on the verge of sinking as they face the wave of high interest rates. Investment experts warn that the practice of blindly buying distressed companies just because they are large must stop. Distressed stocks that cannot even cover interest costs will be the first to slide down as soon as market sentiment worsens slightly.

4. The Reality of Risky Stocks in the Materials Theme

Data analysis identified a representative materials company that has recorded consecutive losses for three years and has a debt reliance exceeding 50%. This company was one of the stocks that experienced a massive surge in share price when it stood at the center of the secondary battery materials theme in the past. In the first half of this year, it captured investors’ attention with significant stock price fluctuations under the new label of the “glass substrate” theme. However, looking behind the glamorous theme, there was no substance; it was a precarious structure barely maintained by debt. With more than half of its total assets consisting of interest-bearing debt, it faces an interest bomb as rates rise. The situation is not much different for other famous large-cap stocks that were once spotlighted as market leaders riding the secondary battery boom. These companies also showed a financial condition that makes it difficult to endure the high-interest era, with debt reliance easily exceeding 40%. They made large investments based solely on expectations of high future growth, but ended up sitting on a mountain of debt without generating profits. In a phase where interest rates have hit the bottom and are rising steeply, these stocks have a structure that makes it very difficult for their share prices to gain momentum. Blindly pouring money in, deceived by flashy news articles and rosy market forecasts, can lead to significant losses.

5. Financial Instability of Large Retailers

Not only the materials industry but also traditional large retail companies with offline stores are not escaping the wave of rising interest rates. Famous retail companies operating large marts frequently visited by the public and prestigious department stores have made the list of at-risk companies. These companies’ annual interest coverage ratio last year fell well below the benchmark of 1.0, proving that their profitability has hit rock bottom. With a debt reliance ratio in the mid-30 percent range, they are in a position where it is difficult to even properly pay interest with operating profits. Once boasting powerful cash generation capabilities, these retail giants have been pushed aside by changing times, resulting in increased debt. The decline of large retail stocks, which were long treated as high-quality stocks providing stable dividends, is giving a great shock to stock investors. As consumer stagnation prolongs and competition intensifies, it has become impossible to cover the growing interest costs with core retail margins. With such a vulnerable financial structure, if market interest rates continue to soar, the company’s liquidity crisis is inevitable. It is too late to endure with the casual thought that “the stock price is at the bottom, so it will eventually rebound,” as the company’s vitality has been severely exhausted. Experts advise that it is wise to decisively cut off large retail stocks that are not generating profits and only accumulating debt.

6. Successful Investment Strategies and Outlook

In the stock market, it is most important to cultivate the eye to analyze substantive financial data rather than being dazzled by the “large-cap” label. The US Federal Reserve’s interest rate hike signal has sent a strong warning message to check the debt levels of companies. In the upcoming phase of prolonged high interest rates, companies with high debt will experience slower stock price recovery and increased bankruptcy risk. Therefore, one must carefully scrutinize the interest coverage ratio and debt reliance of stocks in their portfolio and decisively remove distressed stocks. Only by adjusting investment strategies to focus on high-quality stocks with solid performance and low debt can one survive in a volatile stock market. The upcoming weekly stock market may also face downward pressure due to macroeconomic uncertainty, so hasty trading should be avoided. One needs the wisdom to use index corrections as an opportunity to buy high-quality stocks while strictly avoiding marginal companies with high debt.

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