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Fight or flight? What rising interest rates, inflation and volatile markets mean for investors

SINGAPORE: It has been a punishing six months for investors.

From stocks to bonds, markets have been dealt blows from the Russia-Ukraine war, surging inflation and rising interest rates. COVID-19 uncertainties linger and the risk of recession is back on the radar.

Moving into the second half of 2022, experts said the coast is far from clear.

“We are not out of the woods,” said IG market strategist Yeap Jun Rong, noting higher recession risks in the United States as policymakers wrestle to get inflation under control.

“Market sentiments are expected to remain vulnerable, with catalysts for further selling potentially coming from slowing economic indicators over the coming months.”

With that, what should an investor do?

Some may have retreated to cash – which is not entirely a bad idea to make sure you have sufficient funds as a buffer against surprise expenses or loss of income amid uncertain times. Also, having some cash on the sidelines allows one to “be ready for opportunities”, said CGS-CIMB remisier Ernest Lim.

But in the long run, inflation will erode the value of cash savings. So while caution is warranted amid stomach-churning volatility, experts said it may be better to stay invested.

The key is to be selective, said DBS Bank’s chief investment officer Hou Wey Fook. “To avoid an erosion of spending power and tackle the challenge of rising prices, one should stay invested in quality, income assets,” he told CNA.

Investors should also avoid excessive leverage given the rising interest rate environment, he added.

UOB Asset Management’s senior director of multi-asset strategy Anthony Joseph Raza said markets will remain under pressure in the coming months amid inflation risks, but “there are still positives for mid-to-long-term investments”.

Where are these pockets of opportunity that may help investors to guard against higher inflation and slowing economic growth? Here’s more from the experts.

COMMODITIES

One asset class is commodities, which have raked in some significant gains this year.

Within which, gold is “an excellent store of value and inflation hedge”, said Mr Hou.

Gold, with its dual appeal as a safe-haven asset and a luxury good, sees demand during both good and bad times. The precious metal has also shown an inverse correlation with real rates, with gold prices up when inflation is high and negative rates threaten to erode the value of cash holdings, he explained.

There are various ways for one to gain exposure to gold, such as buying physical gold bars or investing in gold exchange-traded funds (ETFs) or managed funds.

Mr Hou prefers the latter, noting that ETFs and managed funds are more diversified and allow for lower capital commitments. They also remove the logistical costs of owning physical gold.

Holding cash may seem to be a safer bet amid market volatility but it is most vulnerable to inflation, financial and investment experts said. (Photo: iStock/Photobuay)

EQUITIES

Opportunities remain in equities despite the recent selloff, experts said.

For example, energy, real estate and consumer staples are sectors that will hold up in an inflationary environment, according to Mr Hou who cited an analysis of how different sectors in the United States performed during periods of high inflation since 1973.

“The average real returns for energy, real estate and consumer staples were highest among all sectors, at 6.6 per cent, 4.3 per cent and 3.5 per cent respectively,” he said.

Within the real estate space, Mr Hou described Singapore-listed real estate investment trusts (S-REITS) as “inflation winners” given the consistency of dividend distribution and potential to benefit from the reopening of Singapore’s economy.

Mr Lim, the remisier, prefers banks, construction materials and firms linked to the economy reopening, noting that they should “do well in terms of (earnings) results at least this year”.

Phillip Capital’s associate financial services manager Elijah Lee reckoned that it may be time to pay more attention to dividend-paying stocks. While growth stocks have the potential for higher returns due to stronger growth, timing may be a concern.

“If you invest in a growth stock, you're looking for capital gains. The problem is, do you know when that will come?” he said. “The thing about dividend-paying stocks comes down to one word – income (which) helps you to wait for the storm to be over.”

The Singapore stock market is an “attractive market for income”, Mr Lee added, pointing to banking plays and REITS.

That said, not all dividend stocks are the same. Investors still have to be mindful of sectors and individual company fundamentals given how some firms have suspended dividend payments during the pandemic, he noted.

FIXED INCOME

While bonds have an inverse relation to interest rates, this asset class may work as a long-term hedge.

Mr Raza from UOB Asset Management recommends being underweight on fixed income and to shorten the duration of one’s portfolio for now. But on a longer-term basis, he said “yields are much more attractive as compared to what we have seen in a long time”.

“The sooner inflation peaks and subsequently starts to fall, fixed income funds will perform well again.”

“TURN DOWN THE NOISE”

Overall, experts recommended investors to stay diversified with their eyes on the long term. 

Good risk management, according to Mr Lim, usually entails having no more than 30 per cent of one’s portfolio allocated to one particular sector.

As investors, it may be tempting to react to events and market volatility as they happen but as Mr Shane Oliver, head of investment strategy and chief economist of AMP, puts it: “To avoid getting thrown off an appropriate long-term investment strategy, it’s best to turn down the noise.

“At times of uncertainty like now, the flow of negative news reaches fever pitch … All of this makes it harder to stick to an appropriate long-term strategy, which is particularly important,” he added.

Understandably this can be very difficult, especially for new investors, Mr Lee of Phillip Capital said.

“There's a lot of emotions in investing unfortunately but a lot about investing also comes down to your ability to control your emotions.”

He recommends those new to the market to start investing with small, specific dollar amounts regularly — a technique otherwise known as dollar-cost averaging.

This approach spreads out one’s investments by buying into the market at different times and at varying prices, versus making a lump-sum investment.

“For new investors, I will say go in slowly. Now is not the time to go all in. Be cautious and do your research,” said Mr Lee.

“I wouldn't recommend new investors to go for single stock picks. You’ve got to do thorough research and be very committed. If you’re not, then stay diversified.”

Source: CNA/sk(cy)
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