Since the Federal Reserve began raising interest rates in March of last year, many countries and regions, including Hong Kong, have followed suit. Given the close relationship between interest rate movements and the performance of various businesses and assets, investors should pay close attention to interest rate risk when investing.
Since the global financial crisis in 2008, there had been a prolonged period of extremely low interest rates, which may make investors less sensitive to the risks associated with rate hikes. While the Federal Reserve announced multiple rate hikes between 2015 and 2018 as part of the normalisation process, the rate hike cycle at the time was noticeably more modest than the current one. From last March to this July, the Federal Reserve raised interest rates 11 times, for a total increase of 5.25%. This has not only shaken the investment market but has also altered the attitudes and behaviours of investors.
Interest rate movements can be positive or negative to the stock market. For instance, in the interest-sensitive technology sector, ultra-low rates gave rise to many expensive tech giants, making the technology sector one of the largest sectors of the stock market. Despite their high valuations, investors showed a strong demand for tech companies. However, the rate hikes that began last year reversed the strong performance of tech stocks. Last year, the Nasdaq Composite Index, which tracks the performance of tech stocks, plummeted by over 30% and lagged the overall market. Although tech stocks rebounded in the first half of this year, investors should reconsider the investment risks associated with this sector that saw a substantial decline last year.
Reconsider Investment Returns
Have interest rate hikes altered your expectations for investment returns? If you keep up with financial news and information, you may be aware that local banks now offer time deposits with rates as high as 4%, and that the government raised the guaranteed interest rate on the most recent tranche of silver bonds from 4% to 5%. The new batch of retail green bond’s minimum rate was also raised from 2.5% to 4.75%.
Investors did not find time deposits appealing when banks gave almost "zero interest" to savers. Dividend stocks, such as utilities or banks, may appeal to those with a lower risk tolerance because of their stable dividend income. However, as banks now offer attractive interest rates for time deposits, this option has become popular.
As low risk investments like time deposits and government bonds, now offer decent returns, investors naturally expect higher returns from more risky assets such as stocks. There are numerous stocks, including traditional dividend stocks, that offer a dividend yield of more than 5%. However, investors should be aware that a high dividend yield does not necessarily translate into a high dividend payout. A drop in the stock price could be the reason behind it. As a result, investors should not make the investment decisions solely based on the dividend yield.
After multiple rate hikes since last year, the financial market is now looking forward to the end of the cycle. Rate cuts have also been speculated about. Interest rate fluctuations are expected to impact investor sentiment and market volatility in the future. It is important for investors to adhere to the fundamental investment principles, including diversification and avoiding short-term speculative trading, while monitoring the changes in interest rates closely.
