You're listening to AC N A podcast. Welcome back to Money talks. We have a fresh slate of personal finance topics that will help you save and invest your money properly. I'm your host Andrea Heng. And before we introduce our guest, I want to talk about some money related news that may affect you. So I wrote in my editor Tiffany Ang to come chat with me. It's a new segment. We call I on the money. Hello, everybody. So let's get straight to the headlines are
obviously being the first week of January. Happy New Year. Happy New Year. Happy New Year, everyone. Well, it's not just a new year. Actually, we've got a new GST we have. That's right. So in the New Year comes a new year present. 9% GST. That's correct. So, 9% GST if you don't already know that's our goods and services tax, it increased from 8% to 9%. It's been in every single conversation that I've had since the start of this year and it's only been a week. Right. Yeah. Yeah. Actually,
I'm curious. Did you make any big purchases before the clock struck? 12, you know, I actually did, I bought a TV. Not bad. So we were like 1%. The GST actually was the impetus for us to buy a TV. So here's the story. We don't have, we have a TV. We've lived in this house for a year, not had a TV. So we decided, oh, you know what if we want to buy a TV? And we've been mulling it for some time, we better do it before the extra 1%. GST kicks in. So that's what I did. Did you buy anything big ticket
before the GST kicked in? No, I didn't actually because I have everything that I need at the moment. So that's GST big, big headline. We also got some nicer news. It is to help cushion the increase in GST and the rising cost of living everything is going up. So did our CDC vouchers 500 up from 300. I think that's really generous and I can't wait to spend it. But you know what? I had this conversation with my co-host on the morning show at CN A 938, Joel Chua.
And you know what? We're going to donate ours. Oh, that's nice. Yeah, because here's the thing. I forgot to spend the rest of mine. That's what I was gonna ask you what happened, what happened to last year's Trench for you. So I spent, strangely, people find it easier to spend the supermarket ones and the Hawker ones. And that's what you did. I, I like the supermarket ones. It was hard for me to finish spending the Hawker Center one. Right. So, strangely,
the opposite happened with me. I was, I was able to finish the Hawker ones. First. I spent maybe about half of the supermarket ones and then I left the remaining 75 or whatever else that was left behind. And I didn't realize that I forgot, completely, forgot there was an expiry date until I saw on Instagram three of my friends they said they spent New Year's Eve at the supermarket. Well, the good news this year is that you can spend at more participating merchants. Yes, I
think the list is something like 23,000 merchants now. So you can go to, you know, pretty much your Heartland shops, have a check, see if they have that CDC voucher, you know, poster, there was ac N A article that said a lot of our uncles and aunties, they were, you know, buying new phones, new phone cases just before 31st of December. Yeah. So I think a lot of aunties will go get their perms, you know, their hair perms right before Chinese New Year. So, you know, you
don't actually only have to spend it on food. You can support any of these Heartland shops, any of these participating merchants. Well, it's not just about Singapore. We want to talk about some international movements. That's right. So you know, ok, which company beat Tesla as the top maker of electric vehicles. It is Byd, the Chinese brand, I kind of saw this coming because yeah, because Byd China has been really ramping up their electric vehicle industry. A lot of national
efforts poured into this industry. At the same time, Tesla has its own problems, just some stats, right? So Byd took over the crown with almost 40,000 more cars in the fourth quarter of last year. In total, it sold more than 3 million passenger vehicles last year. I mean, this is full and hybrid V combined. So that's interesting whether it's time as an investor to take
a look at Byd in your stock portfolio. If you're looking into the space to diversify your portfolio, there could be potential for it, but of course, always do your homework. You can always ask your financial advisor what he or she thinks and off you go. Now before we get started, I want to check in on you. I want to know how has money talks helped you in 2023? We would really love to know. So drop us a note in the comments. I cannot
wait to see what you tell us. Well, personally, for me, it's been a very educational year as host of money talks. I've learned so much from our guests from spending hacks on credit cards and groceries to investing in unusual portfolios to learning tips from the pros on how to optimize my CPF biggest lesson for me, how to get out of an IP if I really wanted to get out of one, another, thing I learned was how to take advantage of higher interest rates that we saw in 2023.
Yeah, sure. It made things expensive. But I found out that there were in fact ways that this could be useful to me. But the verdict is out from the US Federal Reserve, that's the American Central Bank in case you didn't know they're very likely to stop hiking interest rates and 2024 is the year we will finally start seeing rate cuts. Ok. So in the first place, what do interest rates have to do with inflation? Does it mean we'll see an easing of prices? Let's get some help
making sense of all of this. And that person is Eddie Low chief investment officer at May Bank Singapore. He's in the studio with me on the Money Talks podcast. Welcome, Eddie. Hi, I'm so first of all give us a 101 on interest rates. Ok. What happens when they move? Why are so many things affected by them? I think
if you look at interest rates, it affects us at different levels on the individual personal basis, right? Obviously, depositors are happy when interest rates are higher because you get actually more for your deposits, your time deposits, correct? Not so happy for those who are actually having mortgage loans, right? Because you need to pay more interest. Then on the market side, obviously, it also has implications not necessarily that good for bonds which tend to underperform in the era
of rising interest rates, right? As for equities, it depends really certain interest rate, sensitive sectors or markets will be affected others less
so, right. What are some examples of those sectors? I think
in Singapore, what is very common is actually Singapore S yes, we have actually seen how Singapore rates have actually been negatively impacted when interest rates were rising
and which sectors benefited from the high interest rates.
I think in the normal economy where there's still growth, actually, the banking sector tends to benefit from a rising interest rate environment because you sort of like get the expansion in interest margins while your loan growth, you know, is still somewhat healthy because economy is still chugging along. Yeah.
Yeah, that's an interesting observation, right? The economy went on even though things got more expensive. It was almost as if the high interest rate didn't scare.
It depends on where you are looking at. Obviously what really triggered this spike in interest rates over the 12 to 18 months was really the very high inflation that we have witnessed, not just in Singapore but in other parts of the world US Europe, right? And the US FED had to combat inflation by really hiking interest rates very rapidly and that actually negatively affected. Not so much on the economy, but actually the markets, both equities and bonds because the pace of rate hikes was very
fast. Yeah, it was quite aggressive, very, very
aggressive. And that is something that investors do not
like. Right. Ok. So high consumption, not necessarily a good thing for investors.
Well, it depends on what drove the inflation in the first place. Right. Right. And I think we came out from a very unprecedented time where we had COVID, right. So when the economy started to reopen, obviously there's this pent up demand,
the revenge everything. Yes,
but at the same time, supply wasn't keeping up so that it took time to come back online. Exactly. So that actually drove higher inflation. But we did see inflation coming down this year. Combination of high interest rates as well as normalizing supply chain. How
is it that interest rates have anything to do with inflation? How is it that the US decided? Ok. In order to curb inflation to dampen inflation, I'm gonna aggressively hike interest rates. What's that link
there? Right. Right. So I think inflation can be supply driven all demand driven. So the inflation that witnessed over the past, I don't know, 12 to 18 months is probably a combination, a bit of both. So the interest rate part is actually to tackle the demand. Right. So when you have higher interest rates, cost of money becomes higher. Sure. So theoretically it's going to dampen demand, you know, where people think twice about spending a little bit more.
Sometimes there's a lag effect. It is not like immediate, the rate hikes do not have an immediate impact on demand economy. That's why it took time actually for inflation to come
off. Right? Ok, I understand now. So let's fast forward to what's happening now. The latest news is that the feds, they signaled three cuts in 2024. So tell me this is overall good news, right? What happens now?
Well, if you look at the market reaction to the very Dovish fed statements recently, definitely good news for investors. Yeah, we are anticipating like the fed, there will be three rate cuts starting sometime in second half. Ok? But some of the market participants are even more aggressive pricing in a rate cut in the first half and maybe 100 basis points or even more. That means four
or five rate cuts. So in our view, that's maybe a little bit too aggressive because, well, yes, indeed, we saw inflation moderating. It is still actually a bit higher. A tad higher
things are still
expensive. Yeah. Yeah, and it's like 3% fat is targeting 2%. So is still not exactly back to normal yet. So I think the timing of rate cuts is really uncertain and the fed will really be very data dependent. So it's a bit premature to say, ok, now I'm seeing inflation moderating at 3.1% and therefore the, that is going to cut rates in first quarter, too early. It's
excitement. Right. I'm putting it down to just
markets can overreact to time. But I think I also wanted to point out there are actually also factors to consider. Right. That could keep inflation maybe a little bit higher for longer. I think on a fundamental basis, if you look at the US again because I think that's a key economy that's driving global markets. US, unemployment is still very low compared to historical levels
means more people have jobs, more
people have jobs and wages are still going higher, right? So that's going to lend some upward pressure on inflation.
Yeah, because when people have jobs, they have the means to spend
exactly at the same time if you've noticed on the geopolitical side, some of the trade, like for example, the Red Sea, yes, some of the geopolitical tensions is causing rerouting of trade routes that could actually lead to higher shipping costs and therefore indirectly inflation, it's going to lead to higher costs and then therefore higher inflation, right? So that's a more on the supply side. And therefore these combination of factors could add to the uncertainty about the inflation trajectory,
right? Why do the rate cuts need to be done in such a measured way? Because at the risk of sounding naive, couldn't they just slash it one time and say, OK, one time go 25 basis points, 100 basis points and then bring it down at least to a level that the feds think everyone is agreeable to
good question. So I think to answer that question, I think two points here to make, I think one is the fed has been accused of hiking rates too late. So they do not want to be accused of repeating the mistake again by cutting rates too early. Therefore, they are very cautious in making any rate cuts. And I think they will maintain that very cautious stance. And also if you take a step back for those who, who are a bit older,
if you look at the seventies, right? There was also a similar episode where inflation was very high and then the FED had to hide interest rate to tame inflation. But then they actually, once they saw inflation coming off, they actually cut interest rates and that led to a resurgence in inflation.
So it was a pendulum swing. Yes, exactly.
So, so I think the fed now if you look at fair Chair Power, I don't think he was to go in.
So you mentioned in an environment of higher interest rate benefits one group and it doesn't benefit another group when it comes to falling interest rates, which if all goes well. And Jay Powell says, ok, we can start cutting rates now and we do see those falling interest rates who would it benefit?
Well, obviously those servicing their loans, their mortgage mortgages, I think they will be happier because yeah, at least you don't have to pay as much interest right from an investor standpoint. I think it will benefit both equity and bond investors because if you look at bonds, there is this negative correlation between bond prices and interest rates when interest rate goes higher, bond prices go lower and vice versa. So I think it would be a very conducive environment for
fixed income. Ok? But at the same time for equities, as long as growth stays up, interest rate coming off will also benefit equity investors. At the same time, in particular, more interest rate sensitive sectors. For example, that Singapore reads that we mentioned earlier on some of the growth sectors which the valuation can also be sensitive to interest rates, usually higher interest rates negatively impact the valuation
of these growth stocks. So if interest rate were to come off, right, then it will be deemed as positive for these
growth stocks. Ok. That's excellent stuff. I'm glad you brought that up because this is the part of the where I wanted to tackle how interest rate movements affect our portfolios. So what role did high interest rates play for our investments? I remember investors were flocking to things like your 10 year treasuries, your Singapore government bonds, high yield instruments. Was this why everyone was flocking to these high yield products? And then when the interest rates start to fall,
what do I do now? That I'm in these portfolio instruments, right?
I think definitely we saw very strong flow cash deposits, fixed deposits because of the very high interest rate environment and investors are flowing to these instruments because also partly because of the macro uncertainty. So they are not so sure, right. So the best way is to stay short term, go to cash, go to deposits, go to money market
funds where the level of risk is low, right? But if we get a falling interest rate, what happens is these short term deposits when they mature, you may not be able to get back into them at the same level of rate. So that is actually increasing a reinvestment risk, right? It's always good to have some cash buffer, you know, downside protection for advice. But, but I think given the fact that we, you know, our base case is really for a soft landing for inflation to moderate for
fed to start cutting rates. I think it's time to really redeploy some of this cash into bonds and equities, right? But obviously, I think on the bond side, we still want to stay with quality, right? So you want to have more exposure into investment grade bonds where the default risk tends to be a bit lower save versus high yield credit. So just don't just go blindly chasing after
higher interest rate
or high high bonds because sometimes there's this risk with what trade off. And
I'm glad that you brought that up. Also, it, it's worth clarifying. So you're saying not necessarily stop looking at your higher yield products, but it's time to start thinking about moving into other refinancing, taking the extra cash and pumping it into other safer bets like your bonds or rather
actually not necessarily a safer bets because we are actually advocating or suggesting clients to move out of the so called very low risk cash deposits, which are high yielding at this moment, but may not be as high yielding 12 months down the
road. That's the thing. So I'm glad you said that my question was going to be, when do we start pivoting?
I think we could start actually looking at it right now because investors will be looking ahead. So for while you say you may decide to stay in cash for now, 12 months down the road, the other investments like bonds and equities may become more expensive, the prices may have actually.
So buying in low when bonds are not looking great now would be a good
move, right? In the sense that bond prices, we think that there are still pockets of value within the bonds and as well as equity space. Um So bonds, I mentioned investment grade bonds, I think that is still the place to be in. And you know, they are actually pretty defensive as well, especially if you stick with the higher quality names, right where the default
risk is, you know, relatively low. Ok. Obviously not, not as safe as cash, but I think it's worthwhile taking the additional bit of risk. You
know how there's that adage right time in the market and not timing the market. This sounds a little bit like the opposite, just a little bit. This is where timing does matter a little bit because if you stay too long with your low risk products, you might actually lose out on stuff that might be attractive later on or more expensive later on down the road. Right.
Frankly, I would actually turn it around to say that timing, the market is always very difficult. Right. So, although we try to be tactical about things to move things, shift things around, but we, we, we think that it's actually important to maintain a core portfolio, a mixture of cash bonds and equities because while we try our best, very best to predict where the economies are going, where the markets are going. Nobody can really,
nobody has, nobody has the real, not even Jay Powell,
but it just, just maybe a case in point, case in point is if you look at the beginning of 2023 consensus are actually all predicting a US recession. Yeah. Right. Exactly. A very bearish outlook and 12 months down the road, we did not get the US recession and equity markets did very well for markets not too badly as well.
I mean, they seem to have weathered, everything that was thrown their way. I mean, I remember talking about the big R word as if you know, oh, we need to be scared of this. Now today you can mention the R word and no one really bets an eyelid, not so much,
which actually raises another concern as well because I think the economy is not exactly without this. We still have to bear in mind that as we mentioned, inflation may not come down one straight line. We are actually anticipating global growth, including that of us to soften in 2024. And then coupled with the fact that apart from geopolitics, we also have major elections coming on in
changing of the Guard in so many places in
Asia, as well as in Indonesia, right. So you know, these political elections sometimes can create marker uncertainty. So we need to be conscious of the fact that volatility could still spike from time to time. So the best approach again for us is really to spread your bets, avoid over concentration in any pockets, then you probably will have a smoother ride as
smooth as can be as smooth as can be. Ok. So the one part that I think really affects us all one way or another in a very uncertain environment, especially to do with the interest rates, we're not sure, you know what kind of journey is going to be like our debts. So what would you advise in terms of managing things like our mortgage loans, our car loans, all our owings that are pegged to interest rates. Would you advise refinancing? And there's also that question about whether to go with
fixed or floating rates. Right. Well,
maybe before we go to whether to refinance, maybe I could share some of our projections in terms of interest rates. Right. We are expecting the US fed. Yeah, to cut rate three times in 2024 starting some somewhere in the second half. So Singapore benchmark rates, interest rates are likely to follow in the same direction magnitude could differ slightly, right. So for example, one of the key benchmark rates that we
track is the three months. So where I think a lot of mortgage rates, loans are packed to this new benchmark rate as well, we are actually projecting so a three months or to decline from 3.8% to 3.25%. Ok. Right. So what this means if you say refinance now and lock in for say three year rate, depending on what the rate is, you may potentially lose out on the lower rates that's going to be coming in
in 12 months, right. So, so that's the trajectory. So theoretically, I know friends around me that I talked to, they are also thinking about whether to refinance some of them will refinance and keep it to a very shorter turn. So they have the flexibility precisely to refinance at the lower rate should you know this low interest rate thinking expectation do materialize. Yeah. Correct. Right. So, so I think
that's one school of thought, right? But overall, I would say that in terms of debt management is still the same, but the fundamental basis is also you need to apart from just refinancing fixed rate and what not, but you still need to watch your own debt levels, of course, and manage it according to your income because what's comfortable
for you, what is comfortable for you? The last thing you want is actually to have two high debt levels that you will struggle to keep up with in terms of interest payments and loan
repayments. So that question then about fixed versus floating rates, right? Moving forward. But what should we do? Especially when there's that uncertainty there, if you
do have the expectation that rates are coming down, right? I would say that you would probably want to stick with shorter or floating interest rate. So you float down together, so
yourself flexibility and the comfort to move around a
little correct, the shorter tenure will give you the flexibility and then the floating will give you the benefit of enjoying that lower rates. Should it materialize?
Eddie? It's been a real pleasure to have you on money talks, you've given us so much to think about. And more importantly, you've clarified quite a number of snags for us when it comes to interest rates. So thank you very much for clearing the fog around interest rates and giving us an idea of what to do this year. My pleasure and of course, a big thank you to you listener. Do us a favor. Hey, after this, let us know what you think about this episode. You can find us
on Apple Podcast. We're also on Spotify and guess what? We're also on youtube as well. The team behind Money Talks is Joanne Chan Tiffany Ang Christina Robert Saint and I'm Andrea Heng.