I know, the Fed turned hawkish yet again just recently.
Everyone was in a jubilant mood – the stock market even more so when the Fed stopped hiking rates and hinted at a cut last year.
While the sudden hawkish stance took most people by surprise, I am not too worried about it.
Rates should go down in 2024 – we just don’t know when
This has been an open secret since the end of 2023. High interest rates will never persist as such prolonged conditions will lead to a recession eventually.
We have gone past several FOMC meetings where the Fed was merciless in hiking the rates. So when the rate hikes stopped, it is only natural to assume that rate cuts are just around the corner.
Although it would be foolhardy to rule out any possibility of a recession, the chances of it happening seems slim. Any potential recessionary events would have been triggered in the 2nd half of 2023, as predicted by various economists and analysts.
It could take a while for the rate cuts to be finally delivered and for their effects to be seen, but the world could survive another few months of high-interest rates.
So with the imminent rate cuts, what investment assets could do well?
1. Stocks
The stock markets have already factored in a dovish soft landing since the end of last year.
And with interest rates going down, borrowing costs will decrease, making it easier for companies to grow via capital expenditure, or for cash cow businesses to generate even more cash.
The overall stock market should be fine, barring any other unforeseen black swan events. The fine and mediocre companies will all flourish and thrive together when interest rates come down.
However, that could mean that it would be much more difficult to spot problematic companies until the next hawkish interest rates regime kicks in.
Equities from all sectors should do well – even for the banks as a low interest rate would incentivise big purchases like homes and cars.
That said, you don’t need me or any Fengshui master to tell you that. Look what happened during the year-end of 2023.
This could just be the beginning. Even though some may associate Cramer with jinxing stocks, his newly coined 6-packs are good choices. Despite his reputation, I still think these 6 companies will prove that not even Cramer can put a stop to their red-hot streak.
2. REITs
REITs were hammered and buffeted in 2023.
Most REITs have shown a revival in unit prices when the Fed stopped hiking the rates. Yet most are still trading far from their all-time high (ATH) as debt tenures don’t mature abruptly.
It would take 2-3 years for most REITs to see a lower weighted average financing cost. However, the lower interest rates will help in terms of the property valuations.
Gearing ratios will get a breather. And REITs that still have loan headroom will be seizing the opportunity to start an acquiring spree.
However, I would be a bit more cautious should interest rates stay hawkish for a prolonged period.
Nevertheless, the CapitaLand REITs and Mapletree REITs look solid enough to weather through even if interest rates stay higher for a wee bit longer.
3. Commodities
Most commodities should see more upside overall.
Each underlying may be experiencing different scenarios. The grain complexes – soybean, corn, and wheat are seeing low and depressing prices due to bumper crop harvests in Brazil and Russia, while cocoa, coffee, and sugar prices are rallying.
Due to different moving parts, commodity prices can go up or down. But with a weaker USD, there will be one less reason for bearish prices.
Most if not all commodities are denominated in USD. “Cheaper” USD means it will cost more in dollar terms to buy or sell a commodity.
It could also stimulate more consumption. Although it’s not that straightforward to invest in commodities, investors can look into Commodity ETFs to gain exposure to the commodity markets.
However, do take note of the negative roll yield, which can affect your overall returns.
I wouldn’t necessarily recommend companies in the commodity business as well – you can never be too sure whether the risk or direction of such companies turns out to be favorable or not.
4. Properties
It would not be fair to mention REITs but not properties.
Lower rates could spur more property purchases. Thus in land-scarce Singapore, do not expect prices to correct down significantly.
Just last month, a HDB flat in Toa Payoh fetched a staggering S$1,568,888, setting a new record as the highest-priced resale flat ever sold in Singapore.
That said, there rarely is a downturn in the Singapore property market. Prices were up even during the height of the pandemic.
So it is a no-brainer to bet on the Singapore property market to remain robust this year as well.
On paper, it does bode well for those aiming for a BTO!
5. Cryptocurrency
With fiat financing costs turning cheap once again, we could be looking at the end of the crypto winter.
Bitcoin has seen a solid rally over the past few months, adding about 13% to its value year-to-date, according to data from CoinGecko.
Will we see Bored Ape Yacht Club (BAYC) pictures peppering all over social media again?
It might be too early to say that winter has ended. But putting aside crypto adoption and prospects, so long as there is liquidity, it would be foolish to bet against this speculative asset class when the bandwagon engines start cranking again.
With the Bitcoin Spot ETF done and dusted, crypto aficionados will be looking at the next crypto to obtain a similar status.
Ethereum anyone?
6. China
China deserves a section of its own as the overall market has defied the creed of long-term value investing.
It has instead adhered to the law of gravity, where most stocks have either crashed down from their all-time highs or remained at the bottom.
On the other hand, not only has India overtaken China in terms of population growth, but the Indian stock market capitalization has overtaken Hong Kong’s for the first time.
While it still looks like a tunnel with no light in sight, I do believe that night is always the darkest just before dawn.
Is Tencent Holdings Ltd (HKG: 0700) still a great business? Hell yea.
Does it deserve to be trading at 1/3 price to earnings of Meta Platforms Inc (NASDAQ: META)? Depends if you are a half-cup full or half-cup empty person.
Opportunities are everywhere
While I do take a cue and find the market gyrations amusing when it gets orchestrated subconsciously by the Feds’ comments, I never really bothered using it to time the market.
Common sense prevails, and we just need to not get too affected by short-term headlines.
A lower interest rate will be beneficial overall for the financial market. And it’ll hurt mortgage servicing less!
That said, there are still plenty of uncertainties happening around us.
The Red Sea attacks and uncertain oil prices could still throw a wrench in tampering with not only inflation but also the reassurances that 2024 could be better than 2023.
The eventual slashing of interest rates just takes one variable out of the equation.
But if you are in this for the long term, and if we can miraculously sail through 2024 smoothly, there’s no reason why the mentioned asset classes shouldn’t do well!