The long-awaited interest rate cuts have widespread implications for the global economy. We explore some of the potential impacts on the everyday Singaporean
Like most Singaporean couples who had just registered their marriage, John and his wife were looking to purchase their first home in mid-2023 when interest rates in the US were at a sky-high 5%. The Singapore Overnight Rate Average (Sora), the new interbank lending rate based on actual transactions to price Singapore mortgages, stood at 3.7%, a far cry from the lows of 0.35% Sora in March 2022.
“[The high Sora rate] annoyed us but it was not a factor that deterred us from purchasing a home. Money cannot buy time, and we wanted to get a house as soon as possible,” John explained. So for the next 16 months, the couple financed their housing loan at 3.7% for a resale flat in the north of the city-state that cost slightly more than $750,000.
On Sept 19, the US Federal Reserve (US Fed) cut its interest rates by 50 basis points (bps) to 4.75% to 5%, allowing John and his wife to begin seeing some financial reprieve. They now had the option to refinance their loans at a lower Sora, which dropped to 3.14% as at Sept 25.
The long-awaited interest rate cuts, which are slated to end in a 2.75% to 3% range by 2026, have widespread implications for the global economy.
“A bigger-than-anticipated cut indicates that the Fed wants to stabilise the US economy. Singapore, whose fortunes are closely tied to global economic sentiments, would stand to gain from a stable and strong US market,” says Stephanie Leung, chief investment officer at Stashaway.
See also: MAS set to hold monetary policy as inflation persists
Beyond lowered borrowing costs, what does the US Fed’s decision to cut interest rates mean for the everyday Singaporean? What does it mean for one’s current investment portfolio, and when will it start being a good time to buy bigger-ticket items such as cars?
The Edge Singapore speaks with analysts and chief investment officers from a range of financial institutions to find out more.
High T-Bills rates unlikely to persist
T-Bills, which are short-term Singapore Government Securities (SGS) issued at a discount from their face value that pay a fixed interest rate, have been a highly popular investment instrument in the high interest rate environment.
See also: Singapore's headline inflation rebounds to 3.7% y-o-y; core inflation up to 3.3% y-o-y in December
RHB’s Natarajan suggests investors lock in longer-term fixed deposits to secure higher yields. Photo: RHB
According to RHB Singapore’s (RHB) vice-president of equity research, Vijay Natarajan, T-Bill coupons are closely related to the US Fed’s rates and treasury yields. As such, the falling interest rates mean that the high coupon rates enjoyed by T-Bill investors in the previous high interest rate environment is unlikely to continue moving forward, Natarajan says.
This is evidenced by the six-month Singapore T-Bill auction yield falling from 3.8% in March to 3.1% in September.
Leung notes that this marks the start of the US Fed’s easing cycle, with a further interest rate reduction of 50bps expected this year. Another reduction of 50bps is expected in 2026, ultimately reaching rates between 2.75% and 3.00%.
Given this, Leung notes that high-risk assets are likely to perform well in this environment. Additionally, RHB’s Natarajan suggests that investors can evaluate reallocating some capital from T-Bills to other options in the market including high-quality corporate bonds and dividend-yield equity instruments such as Singapore REITs (S-REITs).
Cash is king?
Fixed deposits are likely to be less attractive as interest rates continue to fall. While investors have been enjoying “safe, stable returns on their cash savings”, the reality is that “choosing not to invest comes with its own risks,” adds Leung.
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She points out that the average inflation rate for the past 20 years is about 4% globally, and returns of just 2%–3% in a fixed deposit means that the value of investors’ cash would have fallen 1%–2% on average annually. This is not the best way forward for investors aiming to build a retirement fund in the long term, Leung adds.
Vasu Menon, managing director of investment strategy at OCBC, concurs. He, too, believes that the interest rate cuts do not bode well for those who are “long on cash”.
Fixed deposit rates are closely related to the interest rate curves, and it is expected that fixed deposit rates will continue to dip if the additional eight rate cuts materialise by 2025, RHB’s Natarajan adds. He believes investors should lock in longer-term fixed deposits to secure higher yields.
Leung suggests a well-balanced portfolio which could earn investors more in the current economic environment while OCBC’s Menon states that the current environment provides a “supportive backdrop” for equities, bonds and gold.
Investors looking for exposure to tech should not let the nominally high valuations scare them as earnings are still steadily growing, says Moomoo’s Lim. Photo: Moomoo Singapore
Are the Magnificent 7 still a magnificent play?
But what sort of equities should investors invest in? US equities, specifically the “Magnificent 7” — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla — have been a popular investment play for Singaporean investors because of capital gains.
Although the tech sector has benefitted from the excitement around generative AI (artificial intelligence), high interest rates have slowed the stocks’ ascent. Hence, a series of rate cuts could boost the technology sector because of the cash burn required by gen AI research, Moomoo Singapore’s chief investment strategist Isaac Lim says. This will allow the tech companies to further “boost investment and innovation”.
However, Lim advises investors with significant exposure to the US tech sector of the risk of overconcentration in their portfolio as the tech sector is traditionally recognised as a cyclical sector and “doubling down may exacerbate losses in the event of a downturn or recession”.
On the other hand, investors looking for exposure to tech should not let the nominally high valuations scare them as earnings are still steadily growing, Lim says.
In the event of a soft landing, Shekhar Jaiswal, head of equity research at RHB, notes that US equity markets have historically performed well during Fed rate-cutting cycles as this generates a “risk-on” environment, boosting equity gains.
A soft landing or goldilocks scenario would lead to higher corporate profits and better yields, a situation where equity markets often tend to outperform bonds, RHB’s Natarajan says. As such, there is merit in shifting away from bonds into equity for better returns, he adds.
Jaiswal suggests that while the investment outlook for cyclicals have improved, long-term investors can continue to focus on US large-cap growth equities.
Traditional investment portfolios comprise 60% equities and 40% bonds, a sentiment that most investment professionals encourage. But will the new economic environment require a shift in weight of portfolio holdings?
Stashaway’s Leung describes the recent interest rate cuts as a “great reset” for bonds, and notes that bond yields are still at one of the highest levels. “With the market expecting more rate cuts likely on the horizon, it’s not too late for investors to get in on the opportunities in the world of fixed income,” she says. She suggests they may want to lock in longer durations given that the yield curve has normalised.
Stashaway’s Leung: A bigger-than-anticipated cut indicates that the Fed wants to stabilise the US economy. Photo: Stashaway
Closer to home
Investors who do not wish to look too far from their own backyard can find bright spots back home. Sectors such as real estate, retail and logistics are poised to benefit from the interest rate cuts.
Ritesh Ganeriwal, head of investment and advisory of Syfe, notes that S-REITs have increased by 15% in the past two months and the upside remains strong. Lower interest rates reduce financing costs and boost the value of underlying assets, hence “S-REITs present a compelling opportunity”, Ganeriwal adds.
RHB’s Jaiswal has identified AIMS APAC REIT, CapitaLand Ascendas REIT A17U , Keppel REIT and Suntec REIT as preferred picks in the REIT sector, with CDL Hospitality Trusts J85 , Keppel REIT and Suntec REIT as key beneficiaries of the rate cut.
Jaiswal expects that the interest rate cuts are likely to lead to higher consumption, benefitting retail, logistics and hospitality sectors alongside non-REIT sectors with high leverage such as the industrial sector. According to Jaiswal, City Developments, ST Engineering and StarHub CC3 will be beneficiaries of the rate cut.
Leung expects cyclical sectors to pick up, with industrial sectors such as manufacturing, transport and infrastructure development as well as consumer discretionary sectors such as entertainment and e-commerce services having the potential to catch up.
Asean play
Additionally, the interest rate cuts could lead to significant investment opportunities in other regions such as Asia. “Historically, Fed easing cycles have been especially beneficial to emerging market [EM] equities when they are not followed by a recession,” Jaiswal says, and Asean economies “appear to be well-positioned for a resurgence”. Maybank analyst Thilan Wickramasinghe agrees, noting that a weaker US dollar could be a catalyst for investors to shift their investments towards regions, including Asean, that offer higher dividend yields.
The view on Japan is mixed. Jaiswal is hesitant while Leung is enthusiastic because she sees a more advanced earnings recovery for Japanese corporates compared to European equities. “Japanese equities are more geared towards cyclicals and would benefit from a global recovery in industrial production,” she says. Moomoo’s Lim agrees. He notes that Japan’s developed stock market is an option, allowing for a well-diversified portfolio that reduces risk and volatility.
Asian and EM equities provide attractive valuations currently, and offer diversification from the US, Jaiswal says.
The US presidential election remains a concern particularly for emerging markets due to the rise of protectionism. “It is anticipated that the opportunity to invest in Asean and other emerging markets will become even clearer once there is evidence of reduced election risks, combined with a soft landing and a weaker USD,” adds Jaiswal.
Will discretionary spending rise?
Savings from lower rates on mortgages and car loans may result in better purchasing power for borrowers, says RHB’s senior equity research analyst, Alfie Yeo. He reckons this may lead to better consumption if the lower debt burden is translated into more spending rather than savings. However, the impact would be slight, and mainly for smaller-ticket items.
“The economy in the first half of the year has not been overly exciting. We hence see some caution and believe that some of these interest savings may not fully translate into consumption expenditure in the general economy,” Yeo notes.
Likewise, Leung from Stashaway says that it may take time for the full impact of a lower interest rate to be felt, as consumers in Singapore may continue to feel the pinch of higher prices in the short term.
Lim from Moomoo figures that consumers could eventually buy big-ticket items like cars or major appliances. Whatever the case, he cautions that the market may remain unsure of the magnitude and pace of future US Fed rate cuts.
“Investors should not miss the forest for the trees. They should not let the speculative nature of future rate cuts be the main deciding factor when it comes to making decisions regarding long-term interest rate sensitive products,” he says.
John and his wife’s actions reflect Lim’s sentiments. The couple plan to save the extra $500 from the lower mortgage rate moving forward. “We will just be saving the money, and won’t increase our spending,” John says.
