Tuesday, 6 November 2018

Risk of Higher Interest Rates Effect On Stocks and Properties Amidst Trade War Between US And China

The stock market has been going on a see-saw ride for many months now. Just a few days ago, stock market worldwide rallied thinking that Trump will end the standoff in trade spat with China. But then on Monday, Asian markets tumbled immediately after White House economic advisor Larry Kudlow gave a clarification that the US is not likely to deal. 

In view of the great uncertainty over the resolution of the ongoing trade row, economic activities will continue to slow down albeit the full impact not being felt in Singapore yet. We remain in a perilous situation. The relentless increase in interest rates by the Federal Reserve certainly does not help the current economies.

On the stock market front, it is a fallacy to think that banks will definitely benefit from a higher interest rate and that it is a good time to buy into banking stocks. Banks may not benefit at all from interest rates rise if the volume of transactions goes down drastically, in particular in an economic recession climate. All economies and companies follow the rule of going through ups and downs. Banks such as DBS and OCBC cannot be delivering gravity-defying higher and higher record profits for every quarter.

On the Singapore property market front, an increase in interest rates in the face of ever-increasing property prices may eventually lead to a decline soon. This is because once cheap money is removed and new buyers take up more expensive property loans, they will have to fork out a lot more in terms of monthly repayment. The below illustrative (using the recent hottest property on the block-Woodleigh Residences) depicts the effects of the monthly housing loan repayment based on varying interest rates over 30 years for those who dare to venture into the private property market at this point in time.

The Hong Kong market has already been seeing signs of a housing downturn amidst the rising interest rates. Application for mortgage applications have dropped and increasing properties being let go at lower asking prices. A similar fate awaits the Singapore property market if things do not improve soon. 

For investors, this represents an extremely rare opportunity to get stocks and properties at a good deal. The moral of the story is to wait for economic events to unfurl. Recession or not, I have learned a good lesson from the 2008 global financial crisis, that is, do not go into the market immediately. Be patient and spread out available cash and accumulate assets gradually over the coming 6 mths instead of pumping all available resources into the market at this juncture as if there is no tomorrow for fear of missing the boat.

1 comment:

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