Commentary: How to protect one’s savings and wealth amid rising interest rates
The US Federal Reserve got it wrong and thought inflation would be transitory.
The United States Federal Reserve got it wrong and thought inflation would be transitory.
However, inflation has proven to be more persistent and has surged to multi-decade highs, forcing sharp interest rate hikes and causing bond yields to surge.
The Fed is now delivering its most aggressive monetary tightening campaign since the 1980s, and officials from the US central bank have kept up the drumbeat of support for extending their run of interest-rate hikes, stressing the need to quash the unexpectedly stubborn inflation.
The Fed is not the only central bank that is hiking rates sharply. Many other major central banks are doing the same, and what happens globally will clearly impact a small and open economy like Singapore.
So, it is no surprise that interest rates here have also increased sharply, and this will affect Singaporeans and how we manage our wealth and savings.
TREAD CAREFULLY AND INVEST GRADUALLY
Rising inflation and interest rates have clearly hurt global investment markets. Both global equities and bonds are down sharply so far this year.
This is unusual because in the past 25 years, there were only two times that both global equities and bonds fell at the same time.
So, what we are seeing now is exceptional. It reflects the highly uncertain investment environment and a slew of worries about the outlook.
And these worries will not go away anytime soon. It will take time to get better clarity.
For now, cash seems to be king. But to only hold cash in a saving account and not invest your monies altogether is not wise because inflation will erode the purchasing power of your money.
And you could miss attractive opportunities to invest for your longer-term financial goals like retirement.
Meanwhile, both equity and bond markets have fallen — which means valuations are looking more attractive — although valuations dropping further cannot be discounted if inflation continues to be stubborn and interest rates continue to rise.
At the same time, there is a healthy level of scepticism among investors, which means that many are simply waiting for the “right” time to invest.
For example, there is nearly US$4.6 trillion (S$6.5 trillion) in money market funds in the US seeking temporary abode and sitting on the side-lines looking for opportunities.
While there are good reasons for Singaporeans to be cautious about investing at least in the short term, younger investors with a good risk appetite and the ability to take a long-term view with their investments should not refrain from investing altogether.
Remember that volatility is a two-sided coin. It represents risk, but it can also create opportunities for those with the patience and risk appetite.
A careful selection of stocks and bonds and diversification are critical for those looking to capitalise on the current market weakness to buy on dips.
Those looking to buy on dips should also consider buying gradually and time-diversifying fresh investments over the coming months through dollar cost averaging, instead of trying to time markets lest they weaken further due to rising inflation and interest rates.
For Singaporeans approaching retirement, whose risk appetite may be more cautious so as not to lose their retirement nest eggs, they can consider putting their monies in fixed deposits where rates have increased sharply.
Singapore Savings Bonds and Treasury Bills — short-term Singapore Government Securities — are other attractive low-risk alternatives to consider.
EVEN MORE IMPORTANT TO SAVE DILIGENTLY NOW
Bringing inflation down from around 8 per cent now to its 2 per cent target will not be easy for the US central bank.
There is a risk that the Fed will miscalculate. And its aggressive rate hikes may cause a recession in the US and elsewhere.
Fed Chairman Jerome Powell has already warned that a recession is possible, although he is hopeful that the Fed can engineer a soft landing.
The US Treasury yield curve has inverted and that means we may be headed for a potential recession in the next 18 months.
Given the risk of a recession, it is even more important for Singaporeans to save more diligently now in case they lose their jobs and need funds to meet their financial commitments and to support themselves and their families.
Setting aside six to 12 months of your income into an emergency fund is imperative if you have not done so already.
To increase savings, assess your expenses carefully and scale back on excesses and unnecessary spending.
This could mean cooking and eating at home more often, rather than at fancier restaurants, or taking a bus or train instead of only taxis or private hire vehicles.
If you have a penchant for frequent online shopping, cut down. Focus more on your needs rather than your wants at this juncture.
KEEP A CLOSE EYE ON MORTGAGE PAYMENTS
The Singapore Government is clearly concerned that rising interest rates could hurt Singaporeans who may borrow too much and invest beyond their means.
This is one reason why the government announced on Sept 29 a fresh set of property cooling measures.
One of the cooling measures was an increase in the medium-term interest rate floor used by private financial institutions to compute a borrower’s Total Debt Servicing Ratio and Mortgage Servicing Ratio by 0.5 percentage points.
The medium-term interest rate for residential property purchase loans and mortgage equity withdrawal loans has been raised to 4 per cent per annum, versus 3.5 per cent previously.
This is to ensure that property purchasers borrow prudently, given rising interest rates, as a property loan is a long-term commitment and usually a household’s largest liability.
Mortgage rates here which have already increased significantly and are now at the highest level in years, with some rates close to 4 per cent per annum.
Those with home loans should ensure that they have set aside enough savings to meet their commitments.
Those looking to buy a property now to capitalise on the recent property frenzy should tread very carefully. The impact of rising mortgage rates should not be taken lightly.
In the US, for example, mortgage rates have surged, hitting the highest level since 2007. This has resulted in US home prices falling for the first time in a decade in July. Elsewhere, in Australia, house prices have also fallen as steep interest rate hikes sour demand.
So, you should not assume that property prices are a one-way street and will continue to rise unhindered.
The move to invest in a property should be a carefully considered decision. Property investments should be viewed within the wider context of holistic financial planning.
While it may be a good long-term investment, to benefit from its intrinsic value, you must be prepared at least to hold it for the long term, and you must have the financial ability to do so — especially the ability to absorb rising borrowing costs.
It may be a long while before interest rates here come down again to levels seen after the pandemic.
It is important for you to understand how high and rising interest rates will impact your finances and how they will affect investment markets, so that you can put in place strategies to safeguard your wealth and capitalise on opportunities to grow it.
Rising interest rates make borrowings like mortgages more expensive, but it can also potentially benefit you through better deposit rates, higher bond yields and more attractive stock market valuations as bourses pull back, offering better entry levels for those looking to make fresh investments in the money markets.
ABOUT THE AUTHOR:
Vasu Menon is Executive Director of Investment Strategy at OCBC Bank.