To The Moon

How ASX and SGX Market performed under high inflation, rising interest rates scenario, any defensive strategies?

In this article, we will first briefly highlight the inflation and monetary environment of the three countries, and will state the differences between the three stock markets and what targets are suitable for the current environment for reference only.

On May 4, the U.S.A Federal Reserve announced a 50bp interest rate hike for the first time in 22 years, raising the target range of the federal funds rate from 0.25%~ 0.50% to 0.75%~1.00%.

On May 3, the RBA announced an interest rate increase of 25 basis points, raising the benchmark interest rate from an all-time low of 0.1% to 0.35%, which is the first interest rate increase by the RBA since 2010.

On April 14, the monetary authority of Singapore issued a policy statement saying that in order to curb inflation, the HKMA will further tighten monetary policy and reset the middle level of the nominal effective exchange rate policy range of the Singapore dollar, which is the monetary policy tightened again after October 2021.

1. Inflation and monetary policy in the United States, Singapore and Australia

US inflation rose 8.3% year-on-year in April and is expected to be 8.1%, slightly easing from the peak in March, but still close to the highest level since the summer of 1982. Excluding volatile food and energy prices, core CPI rose 6.2%, 0.3% month on month (MOM) and 0.2% expected.

In Depth: What is the CPI and Why does it Matter?

On April 26, the monetary authority of Singapore announced that Singapore's overall inflation rate reached 5.4% in March, a new high in recent 10 years. According to the monetary authority of Singapore and the Ministry of trade and industry, Singapore's overall inflation rate is expected to be 4.5% - 5.5% in 2022, and the core inflation rate is expected to average 2.5% - 3.5%.

Australia's consumer price index (CPI) increased by 5.1% year-on-year In the first quarter of this year, a new high since 2001.

Related Monetary Policies

The US Federal Reserve said that lower inflation remains the focus of its work, and the market is expected to increase interest rates twice this year, at least once will increase by 50 bps.

The Singapore Monetary Authority issued a statement in April saying that the core inflation rate will rise in an all-round way in 2022, and the basic inflation pressure is still a risk factor in the medium term. In order to curb inflation, the HKMA will further tighten monetary policy, reset the middle level of the nominal effective exchange rate policy range of the Singapore dollar, and slightly increase the slope of the range, but maintain the width of the policy range unchanged.

The Federal Reserve of Australia: since 1990, the cash rate has been in a secure 30-year decline, a journey from 17.5% 0.1% in Australia, After the first rate hike since 2010 in 2022 May, the RBA also hinted that it would raise interest rates further.

2、Under high inflation, the decline of US stocks is worse than that of SGX and ASX. Why?

Inflation is so high that oil prices reached more than $100 in May, and countries are worried about recession, espeacially Interest rate sensitive growth technology stocks lost the most so far in this year.

The following table shows the response of US stocks, AUX, SGX to the interest rate increase and the stock markets performances so far.

From the Chat, we can see U.S. stocks fell the most, Australian stocks fell 4%, and Singapore's stock market continued to rise this year. Why?

You are welcome to understand the composition characteristics of the three major stock indexes of the US market, SGX , and ASX.

As the world's largest stock market, the U.S. stock market attracts excellent enterprises from all over the world to list. Among them, the $NASDAQ(.IXIC)$ is dominated by new industries, and its constituent stocks include computer hardware stocks, chip stocks, software stocks, semiconductor materials stocks, network stocks, communication stocks, and biotechnology and other stocks. The $DJIA(.DJI)$ is compiled by 30 industrial companies. The benchmark $S&P 500(.SPX)$ covers all enterprises, and the risks are more dispersed.

Therefore, under the influence of high interest rates and inflation, the interest rate sensitive $(NASDAQ)$ constituent stocks have fallen the most this year, reaching 27% decline, the $(.SPX)$ fell 17%, and the$( .DJI)$, which reflects the production of fundamentals, fell 12%.

The Singapore $Straits Times Index(STI.SI)$ is mainly composed of financial stocks, communication stocks, real estate stocks, planting stocks and food stocks. In particular, the 3 financial stocks (DBS Bank, overseas Chinese bank and UOB) alone account for as much as 40% of the market value of the STI index.

The financial, food and real estate industries have some benefits under the current round of interest rate hikes and high inflation. Since this year, the Singapore stock market has risen 2.35%.

Regarding AUX，inside the article of  For Every Beginner | ASX Stocks Trading Rules & Process , we introduced the 11 sectors' weights of ASX, which are Financials (30.1%), Raw Materials (17.6%), Healthcare (10.9%), Consumer Discretionary (8.2%), Real Estate (7.1%), Industry (7.1%), Consumer Staples (5.2%), Information Technology (4.6%), Communication Services (4.3%), Energy (2.9%), Utilities (1.5%).

Besides that，in the  2 Charts to Get Average Returns of ASX Stocks and Funds ，also mentioned 80% of last 10 years that $S&P/ASX 200(XJO.AU)$ got positive returns.

Will the 2022 became a much different year?

3、What industries can perform well under high inflation?

The following is the research chart from Schroders, which is also recognized: for example, in the field of Precious metals and Ming, energy, Equity Reits, Utilities,  consumer staples, etc.

Indetail: 

Although equities in general perform quite poorly in high and rising inflation environments, there are potential areas to seek refuge at the sector level. 
The energy sector, which includes oil and gas companies, is one of them.Equity REITs (real estate investment trusts) may also provide protection. They outperformed inflation 67% of the time and posted an average real return of 4.7%.

Equity REITs (real estate investment trusts) may also provide protection. They outperformed inflation 67% of the time and posted an average real return of 4.7%.

Utility stocks display a somewhat disappointing success rate of 50%.

Meanwhile the track record for companies in the precious metals and mining sector is mixed.On average, such firms posted an average real return of 8.0% in high and rising inflation environments.

Simply speaking, what you would own is:

• Real Estate
• Commodities
• Stocks (but only stocks with pricing power and strong cash flows)
• Gold

Regading Any pacifical defensive or beat inflation stocks , please follow @ASX_Stars for fure references, if you have any good choices, please comment under the post.  

Note:

When investing in stocks, don't make a purchase simply because of a recommendation. Take these recommendations as a good starting point to do your own research to understand the intricacies of the company, industry, and environment. Leverage onadvanced charting tools andpersonalised investment ideas to select an investment that suits your palate and investment strategy.