Interest rates

Fight or flee? What rising interest rates, inflation and market volatility mean for investors

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

From stocks to bonds, markets have been hit hard by the Russian-Ukrainian war, soaring inflation and rising interest rates. COVID-19 uncertainties persist and recession risk is back on the radar.

Going into the second half of 2022, experts said the coast was far from clear.

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

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

With that, what should an investor do?

Some may have withdrawn in cash – not entirely a bad idea to ensure you have sufficient funds to protect against surprise expenses or loss of income in uncertain times. In addition, having money in reserve allows you to “be ready for opportunities”, said CGS-CIMB introducer 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 might be best to stay invested.

The key is to be selective, said Hou Wey Fook, chief investment officer of DBS Bank. “To avoid an erosion of purchasing power and meet the challenge of rising prices, you have to stay invested in quality, income-generating assets,” he told CNA.

Investors should also avoid excessive leverage given rising interest rates, 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 due to inflation risks, but “there are still bright spots for medium and long term investments.

Where are those pockets of opportunity that can help investors hedge against rising inflation and slowing economic growth? Here are more experts.

BASIC PRODUCTS

One asset class is commodities, which have made significant gains this year.

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

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

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

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