After the Federal Reserve made 3 rate cuts in 2019, what should Singapore investors do in 2020?
2019 was the year that the Federal Reserve started cutting rates, after raising rates from December 2015. By the second half of 2019, the Fed had announced 3 rate cuts, leaving the federal funds rate at the current 1.5% to 1.75% level.
The cuts were made in light of the trade war between China and the US, the slowdown in the global economy, and arguably under the influence of President Trump to cut rates.
The real question is, how does this affect Singapore, and how should investors react?
What rate does the US Federal Reserve cut? – A Primer
To fully understand the impact of the Fed rate cuts, we must first understand what it is cutting in the first place.
The US Federal Reserve controls the federal funds rate, which is the cost of uncollateralised overnight borrowings between financial institutions and banks in US. A rate hike increases the current federal funds rate, while a rate cut decreases it.
Changes in the federal funds rate affects the money supply, and influences economic growth and inflation in the US.
Alfred Chia, the CEO of SingCapital, believes the rate cuts were pre-emptive measures by the Fed and does not expect further cuts for now. “The Federal Reserve uses interest rates to combat inflation, but there is no risk of runaway inflation at the moment, so I don’t think they will make further cuts in the foreseeable future,” says Chia.
Global economy looks stable in 2020
To be sure, things are already looking up with the signing of the “phase one” trade deal between US and China, finally bringing the trade war to a truce.
As Chia explains it, an escalation of the trade war could be detrimental to both China and the US, so it was pertinent that both parties came to an agreement.
“With the trade war stabilised and the US economy doing well – particularly with the sitting president seeking a re-election – the global economy should remain stable, barring unforeseen situations in the Middle East,” Chia continues.
“It may not be the best of times, but in general, the global economy will be stable.”
What should investors in Singapore do when the Fed cuts rates?
Central banks frequently take their cue from the US Federal Reserve, so interest rates in Singapore will inadvertently be influenced by the Fed’s actions. As such, Chia expects interest rates in 2020 to remain low and advises investors to take advantage of it.
“When interest rates remain low, as an investor, your yields will be low too. So if investors want to get a higher yield, they need to go for riskier assets,” Chia explains. “Investing in stocks and shares will offer much more attractive yields.”
What about homeowners?
“Home owners can take advantage of lower interest rates to refinance or reprice their home loans, by sifting out bank loans that offer a good deal,” he continues.
“And if you don’t know where to start, you can always find out from SingCapital,” he says sincerely.
Investing beyond a new year resolution
Chia believes that investors should not think about their investment the way they think about their new year resolutions.
“Investment is not like your weight loss plan, where you can aim to achieve your ideal weight in the short term through perseverance and discipline alone. Investment is having a medium to long term view, understanding your risk and your investment goals, and not looking for the latest trend or fad,” he says.
“Last year was a good example. The market was volatile and there were a lot of conflicting views, but most of the market did very well, including the China market which went up by 20% to 30% and the S&P500. If you invested at the start of the year, and stayed invested, you would have made a good return.”
Instead of looking for a new trending investment, Chia recommends investors take the new year to review and rebalance their existing investment, based on the current interest rate movements.
To keep investors informed, SingCapital is hosting its annual Investment Outlook Seminar for 2020 on Feb 8, supported by PropNex, Phillip Securities, and Aberdeen Standard. The seminar will touch on the investment and property outlook for 2020 as well as the financial strategies that can help investors take advantage of the current market environment. Interested investors can register for the seminar here.
“Things are constantly evolving and you need to remain up to date on what is happening,” he concludes.