Essentially, when there is a rate hike, the cost of borrowing money is higher which translates into a lower household disposable income. People will have less incentive to spend money when that happens, and businesses will feel the brunt of that in the form of lower profits. That is not the only way businesses will be affected; they will also have to face higher borrowing costs which may lead to slower growth and of course lower profits in the long term. In a nutshell, a rate hike should lead to a hit in the stock market by theory. And so far, the theory is holding true, with markets worldwide taking a hit this week. At the point of this writing, the Dow Jones is 464.06 points down at 22,859.60, a 2% drop.
So that's the brief macro background for today.
Now turning to the Singapore market, I updated the 52-week low table here. As you can see, those which are highlighted are roughly the same (1% above 52-week low) with a new addition of Sembcorp Industries. Interestingly, all the highlighted stocks made fresh new 52-week lows after I wrote my last post, Keppel Corp at 5.89, Sembcorp Industries at 2.52, SATS at 4.55, Singtel at 2.93, Venture at 14.11 and SPH at 2.35. The closing prices I am using here is the prices of Thursday 20 December 2018.
When rates go higher, investors tend to venture out of riskier assets like stocks and buy safe haven instruments such as government bonds (especially US treasuries). The risk premium (the difference between the return of the risky asset in question and the return of risk-free assets) is narrowing. For example, why would I buy a risky asset like a stock when I am only getting extra 1% of yield as opposed to buying a government bond? For reference, the US 10-Year Treasury Note is trading at 2.766% yield at this point of writing. If I would compare with a stock like SATS which is trading at 3.93% at its current price, I need to question if the prospects of SATS are good enough to justify the (3.93-2.766)= 1.164% spread (which honestly isn't that high).
So what's my gameplan for now? Conventional wisdom tells us that the rate hikes will definitely be bearish in the short term for stocks and the 90 day truce for the US-China trade war does not seem to be working well. I will be looking to see if there is further weakness in the Singapore market and see if there are any buying opportunities in terms of undervalued stocks. One of which I highlighted would be SATS at 4.5 at 4% yield. I would also be talking about some REITs which I am currently interested about in my next post.
Stay tuned and happy holidays for the rest of the year!
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