How to invest with your ang pow money

TL;DR

• The year of the Tiger might see much volatility in the stock market. Investors will have to navigate a river of “uncertainties and extremes”.
• For those who believe in Feng Shui, water-related industries such as trade, shipping and travel could do well in the year of the Tiger.
• If you’d prefer to look at market trends like us, then inflation and interest rate hikes might be what will move the market in the year ahead.
• Value stocks tend to do better than growth stocks with higher interest rates. Reflecting this, the Singapore market rose 7% in January, compared to the declines in the US market.

What happened?

It’s the time of the year again when we are feeling more prosperous from the ang pow money received and all the feasting during Chinese New Year! If you are not one of the lucky winners of the Toto Hong Bao Draw prize of $12 million, we hope to be able to still help you think about growing your wealth through making good investment decisions in the year of the Tiger!

The start of 2022 has been marked by a pullback in the US market with the S&P index down 5.9% in January, marking the worst monthly performance since the pandemic began. The tech-heavy NASDAQ index performed even worse, with a 9.0% fall in January, narrowly avoiding its worst ever start to the year! Own Netflix? That’s down 29% in January. Peloton? Down 24%. Sea Limited? Down 33%

The extreme volatility has made it difficult for many #Beansprouters to navigate and invest. Here, we share some of the key themes of the market in the year ahead, so that you can plan how to make use of the market correction to invest your ang pow money.

What does this mean?

Water-related industries might do well if you believe in Feng Shui

If you are a believer in Feng Shui, then look no further than the CLSA Feng Shui guide, the investment bank’s annual tongue-in-cheek zodiac guide to the Hang Seng Index. According to the shifus behind the guide, investors will have to “navigate a river of uncertainties and extremes” in the Year of the Water Tiger.

According to the same shifus, a good beginning to the lunar new year could turn sour in March before returning to steady growth and peaking over the summer months of June and July. The market could then pause and decline in August and September before picking up again from October onwards.

Which then are the sectors that would do well in the year of the tiger? Water-related ones, which include trade, shipping and travel, are expected to flow again. On the other hand, fire is lacking, so internet and tech-related stocks could remain under pressure.

Inflation and interest rate increases might be key themes for those looking at market trends like us

Were you at the petrol station recently and had a shock that pump prices are so expensive? Did you have to recontract your electricity bill recently and found that your utilities bills have gone up by so much? That’s because we are seeing higher inflation as there is stronger demand for goods and services globally, while supply issues involving labour and transport bottlenecks still persist. It is no wonder that the US Consumer Price Index rose 7% from a year ago in December 2021, the highest level in 39-years.

These inflation pressures are unlikely to ease anytime soon. The MAS projects core inflation in 2022 to be 2-3% this year, higher than its previous expectation of 1-2% back in October 2021. In the meantime, oil price is trading close to US$88 per barrel, the highest level since October 2014. Global investment bank Goldman Sachs foresees oil hitting US$100/barrel sometime in 2022, while JP Morgan believes it could go up to as high as US$125/barrel due to a lack of spare capacity.

What can be done to curb high inflation? One of the ways is to raise interest rates which will cause more money to be locked up in long-term deposits. This is why the market is watching any action by the US Federal Reserve (Fed) very closely, as a very quick pace of interest rate increase could reverse the very positive conditions that led to the stock market’s strong performance since the pandemic started.

The current market expectation is for there to be three to four rate hikes in 2022, meaning that interest rates could rise by 75 to 100 basis points over the course of the year. In fact, Bank of America economists are expecting the Fed to raise rates by seven times this year!

Read also: Why we are worried about persistent inflation

What would Beansprout do?

If you are like us and believe in putting your ang pow money into key market trends, then inflation, interest rate increases and value might be themes worth looking at.

What is good for inflation? For investors who would like to hedge against inflation, commodities such as oil are usually considered to the assets to own in a high inflation environment due to their limited supply. The United States Oil Fund ETF (USO) is an exchange traded fund (ETF) that offers exposure to the oil price.

Which companies benefit from higher interest rates?  Financial companies such as banks are typically seen as beneficiaries from higher interest rates, as they are able to make a higher profit from loans provided to consumers. These would include banks in the US such as Bank of America Corp (BAC) and JP Morgan (JPM). Closer to home, local banks such as DBS and UOB are also seen as potential beneficiaries from higher interest rates.

Value over growth. One of the consequence of higher interest rates, is that stocks which are seen to be “high-growth” could see a fall in their price as investors give a lower value to future earnings the company could generate. After all, why wait 10 years to wait for the cashflow to come in when you could be earning a higher interest rate by putting your money with US bonds with lower risk now? As a result, value stocks might continue to do better than growth stocks.

Long seen as a market offering deep value, the Singapore market as represented by the STI index was up 7.2% in January 2022. This stands in sharp contrast to the sharp declines that we saw in the US. Also, a significant portion of STI ETF is made up of Singapore banks. And as we just shared earlier, banks like DBS and UOB could stand to make higher profits when interest rates go up!

For those who would like to put their faith in Feng Shui, then water-related industries such as trade, shipping and travel might be where your ang pow money is going into. After all, the world seems to be re-opening towards normalcy once again as the Omicron wave starts to ease (and hoping for no more nasty variants).

Still not sure how to invest? Then it might be worth thinking long term. It is useful to know that $100 of your ang pow money invested into the S&P index in the previous year of the Tiger in 2010 would have turned into more than $440 today!