Strategic allocation: stock market to recover, bond market neutral
We can characterize 2008 as the collapse of the bubble. Excluding bond-type
products, most asset classes fell about 40% amid the collapse of the liquidity
bubble stemming from low interest rates. While credit spreads rose for bonds,
overall return was solid on strong KTB yields from the fall in interest rates.
Meanwhile, for 2009, domestic stocks should give positive returns. Though
economic indicators may worsen further near term, the market should rebound
faster than the economy as stimulus bolsters hopes for economic turnaround. In
particular, our analysis shows that the stock market leads the economy by one
year. Thus, we expect the stock market will pick up this year, assuming that the
current economic conditions persist. Finally, the domestic fixed-income market
is likely to be hurt by aggressive rate cuts in 1H, but volatility should rise in 2H
on potentially higher yields following massive KTB issuance.
Tactical allocation: slightly underweight equity, overweight bonds
Based on our Fed model, yield gap stands at 6.2%p, 0.4%p higher than the
five-year average. Although falling yields could catalyze the stock market, the
impact would likely be limited, as the market’s current valuation is more
demanding than the five-year average. Meanwhile, we expect the bond market
to benefit from lower yields near term given the government’s resolve to boost
the economy, supporting lower yields and rising liquidity. Our tactical asset
allocation for 1Q09 is as follows: domestic equities 39%, domestic bonds 55%,
overseas equities 3%, overseas bonds 0%, and alternative investments 3%.

Contents
I. 2008 trends, by asset class .........................................................................................
II. Strategic asset allocation (2009)................................................................................
􀁺 1. Long-term outlook, by asset class
􀁺 2. Return and risk characteristics, by investor: standard portfolio requirements
􀁺 3. Strategic asset allocation results
III. Tactical asset allocation (over next quarter)............................................................
􀁺 1. Near-term outlook, by asset class
􀁺 2. Short-term change in risk/return profile
􀁺 3. Tactical asset allocation return (three-month forward)
IV. Model portfolio by asset type....................................................................................
􀁺 1. Domestic Equity Model Portfolio
􀁺 2. Domestic Bond Model Portfolio