11.2022 Life Guide
Investment direction and strategy under the interest rate raising cycle
Oriental Petrochemical (Taiwan) Investment Advisor / Xie Yifan, Lin Xiaohan
Why have governments announced interest rate hikes this year? What impact will the interest rate hike have on the housing market, the stock market, and even the investment strategy? In the era of interest rate rise, how do investors choose targets? This article will analyze for you one by one.
Target of interest rate increase
Interest control is one of the monetary policies used by the central banks of various countries to achieve economic goals. Among them, raising interest rates is usually intended to curb inflation caused by overheated economic activities, reduce consumption, investment, financial market heat and other effects, and return prices to a stable and controllable level, but at the cost of slowing down economic growth for a period of time.
After the epidemic, although the global economy has gradually recovered, the consumer price index has also climbed to a new high in recent years. In the face of severe inflationary pressure, central banks, led by the Federal Reserve System of the United States (hereinafter referred to as the Federal Reserve System), are actively taking interest rate raising measures to suppress inflation.
What will be the impact of raising interest rates?
The Federal Reserve System's interest rate increase will cause global funds to flow into the United States, causing the appreciation of the U.S. dollar, while the currencies of other countries will depreciate. In addition, the economic activities and imports and exports of goods of various countries are directly affected by the dollar exchange rate, and even affect the operation of global enterprises, as well as the consumption and investment behavior of the people. The following are some markets and objects affected by interest rate rise:
1. Housing market: After the housing loan interest rate rises, the monthly repayment amount increases, which may reduce the housing market demand and shake the house price. In addition, the rental market is also prone to increase rents due to rising costs.
2. Stock market: As investors expect that economic growth will slow down in the future, resulting in a decline in trading volume, stock price correction, and short-term liquidity reduction, the stock price will eventually return to the fundamentals after the market has digested the information.
3. Enterprises: With the increase of loan interest by banks, the debt ratio of enterprises will increase, which will be more affected than companies relying on external financing. Not only that, the increase in interest rate represents the decrease of circulating funds. Without the help of hot money, the evaluation of enterprises given by the market will be readjusted. With other conditions unchanged, the valuation will decline accordingly.
4. Investor: Although the interest rate increase is conducive to the increase of deposit interest rate, the rate increase of the Taiwan Central Bank is not as large as that of the Federal Reserve System, and the capital in the financial market will still flow out, leading to the devaluation of the exchange rate. At the same time, the growth rate of inflation is also faster than the rate of interest increase. The real interest rate is still negative or extremely low, and the asset value is easily offset by inflation, resulting in a decline in real purchasing power.
Stock market investment strategy
1. Short term: Under the trend of high inflation and interest rate rise cycle in the short-term market, asset prices are bound to be affected. It is recommended to invest in industries less affected, stable stocks with high dividends, or index ETFs.
2. Long term: The Federal Reserve System will continue to restrain high inflation by raising interest rates until the economic goal is achieved. Although the market is inevitably affected by panic and liquidity in the process, it is a temporary correction. In the long run, with the progress of science and technology, the market value of the global stock market will continue to grow steadily. Therefore, when the stock price is over corrected, it is still possible to consider timely entry and long-term investment to keep the capital in the market and wait for the recovery of the economy. At the same time, it can also get rewards through compound interest.
What types of stocks are suitable for investment?
1. Financial stocks: The interest rate increase will enlarge the interest margin, which will have a positive impact on banks. In addition, the long-term interest distribution is stable, so we can consider choosing financial stocks of pure commercial banks.
2. Energy stocks: The price of energy (such as crude oil and natural gas) will rise with inflation, which belongs to the industry benefiting from high inflation.
3. Consumer stocks of necessities for the people's livelihood: necessities for the people's livelihood (such as food stocks) are rigid demands, less affected by the economic cycle.
4. High yield and market capitalization ETFs: they can share individual stock risks through a basket of different stocks, and the volatility is more stable than investing in individual stocks.
Target of interest rate increase
Interest control is one of the monetary policies used by the central banks of various countries to achieve economic goals. Among them, raising interest rates is usually intended to curb inflation caused by overheated economic activities, reduce consumption, investment, financial market heat and other effects, and return prices to a stable and controllable level, but at the cost of slowing down economic growth for a period of time.
After the epidemic, although the global economy has gradually recovered, the consumer price index has also climbed to a new high in recent years. In the face of severe inflationary pressure, central banks, led by the Federal Reserve System of the United States (hereinafter referred to as the Federal Reserve System), are actively taking interest rate raising measures to suppress inflation.
What will be the impact of raising interest rates?
The Federal Reserve System's interest rate increase will cause global funds to flow into the United States, causing the appreciation of the U.S. dollar, while the currencies of other countries will depreciate. In addition, the economic activities and imports and exports of goods of various countries are directly affected by the dollar exchange rate, and even affect the operation of global enterprises, as well as the consumption and investment behavior of the people. The following are some markets and objects affected by interest rate rise:
1. Housing market: After the housing loan interest rate rises, the monthly repayment amount increases, which may reduce the housing market demand and shake the house price. In addition, the rental market is also prone to increase rents due to rising costs.
2. Stock market: As investors expect that economic growth will slow down in the future, resulting in a decline in trading volume, stock price correction, and short-term liquidity reduction, the stock price will eventually return to the fundamentals after the market has digested the information.
3. Enterprises: With the increase of loan interest by banks, the debt ratio of enterprises will increase, which will be more affected than companies relying on external financing. Not only that, the increase in interest rate represents the decrease of circulating funds. Without the help of hot money, the evaluation of enterprises given by the market will be readjusted. With other conditions unchanged, the valuation will decline accordingly.
4. Investor: Although the interest rate increase is conducive to the increase of deposit interest rate, the rate increase of the Taiwan Central Bank is not as large as that of the Federal Reserve System, and the capital in the financial market will still flow out, leading to the devaluation of the exchange rate. At the same time, the growth rate of inflation is also faster than the rate of interest increase. The real interest rate is still negative or extremely low, and the asset value is easily offset by inflation, resulting in a decline in real purchasing power.
Stock market investment strategy
1. Short term: Under the trend of high inflation and interest rate rise cycle in the short-term market, asset prices are bound to be affected. It is recommended to invest in industries less affected, stable stocks with high dividends, or index ETFs.
2. Long term: The Federal Reserve System will continue to restrain high inflation by raising interest rates until the economic goal is achieved. Although the market is inevitably affected by panic and liquidity in the process, it is a temporary correction. In the long run, with the progress of science and technology, the market value of the global stock market will continue to grow steadily. Therefore, when the stock price is over corrected, it is still possible to consider timely entry and long-term investment to keep the capital in the market and wait for the recovery of the economy. At the same time, it can also get rewards through compound interest.
What types of stocks are suitable for investment?
1. Financial stocks: The interest rate increase will enlarge the interest margin, which will have a positive impact on banks. In addition, the long-term interest distribution is stable, so we can consider choosing financial stocks of pure commercial banks.
2. Energy stocks: The price of energy (such as crude oil and natural gas) will rise with inflation, which belongs to the industry benefiting from high inflation.
3. Consumer stocks of necessities for the people's livelihood: necessities for the people's livelihood (such as food stocks) are rigid demands, less affected by the economic cycle.
4. High yield and market capitalization ETFs: they can share individual stock risks through a basket of different stocks, and the volatility is more stable than investing in individual stocks.
