Investors should diversify ahead of rate cuts – FOW Singapore

A fresh cycle of interest rate cuts fuelled by the Federal Reserve’s first reduction in four years will benefit investors who have diversified their exposure, according to an industry expert.

Speaking at the FOW Trading Singapore event on Wednesday, the chief investment officer for South-east Asia and India in the Global Private Banking and Wealth business at HSBC said the US 50 basis point cut last week will be positive for a range of sectors.

“I would say that the interest rate cut cycle this time around is actually a very powerful tailwind for risk assets,” James Cheo said in a keynote speech. “If you look at bond markets, if you do get an entire cut cycle, low interest rates would clearly benefit bond and fixed income securities. Regardless of the timing, I think there is still quite a bit of juice when it comes to fixed income purely from the nature of the way it is structured.”

Cheo said equities and emerging market securities would also benefit, as investors look to preserve income streams and lock in yield in the new environment. In general, he said equities have performed well despite recent sell-offs but more firms should look to diversify their exposure.

“Despite the world slowing down, earnings momentum is still actually fairly strong across the world,” Cheo said. “S&P 500 Index earnings growth this year is still likely to be around 10%, and in emerging Asia – particularly in Korea and Taiwan for example - earnings growth is maintaining a very fast pace. One key takeaway is that you don’t want to just be invested in the US or the tech, you want to broaden out your exposure and think about being exposed to financials, healthcare and other sectors that we think could do well in the months ahead.”

Speaking as Cboe Global Markets prepared the launch of new volatility products to enrich the complex ahead of the US election cycle, the firm’s head of product innovation last month said the pre-election period was typically a catalyst for volatility. Cheong agreed, adding equity indexes were likely to gain a further boost.

“The big question is what is going to happen around US election risk,” he added. “If you look through history, the run up to US elections always means increasing volatility, but in terms of price action it's actually positive for stock markets. That is true in almost every single election year, with the exception of 2008.”