Published on Jul 21, 2013
Experts give advice on how investors and home loan borrowers can minimise risks
By Melissa Tan
Bonds will be affected most, say analysts
The spectre of rising interest rates is spooking global markets.
Bond yields have spiked and stock prices have fallen in anticipation of rates going up after the United States Federal Reserve signalled recently that it may reduce its monetary stimulus programme, also known as the third round of quantitative easing.
The question foremost on the minds of analysts is the timing of the inevitable rise in interest rates.
"It is no longer about if it happens and more about when it does," said Barclays Asia investment strategist Wellian Wiranto, who reckons that the Fed's tapering of the quantitative easing could start in September this year.
"Still, investors should note that US policymakers are unlikely to withdraw liquidity massively and suddenly."
UOB economist Alvin Liew said the rise could be capped by factors such as weakness in US economic output, potential euro zone risk events or a sell-off in equities.
He expects that the first increase in short-term interest rates will come only in the first quarter of 2015.
Rising interest rates will have an impact on consumers' loans, especially if they hold significant mortgages. Their investments across the different asset classes might also be affected.
The Sunday Times asks experts what investors can do to minimise the risk of rising interest rates.
DBS chief executive Piyush Gupta told private banking clients last Monday that "if you're a borrower, then I would say start thinking fixing rates, or at least swopping floating to fixed", according to a Business Times report last week .
Indeed, many consumers who hold floating-rate home loans may now be thinking of making the switch to a fixed-rate mortgage to lock in potentially cheaper rates.
Home loans are usually either at a fixed rate or a floating rate, though some banks offer a hybrid package.
Floating rates tend to be pegged to benchmark market rates such as the Singapore Interbank Offered Rate (Sibor) or the Swap Offered Rate, to which banks then add on a premium.
OCBC head of consumer secured lending Phang Lah Hwa said that fixed-rate housing loans are suitable for those who want their monthly instalments to remain stable.
"As the interest rate is fixed for the lock-in period, the monthly instalments will be fixed and will not change," she said.
"Market-pegged interest rates are more suitable for savvy property owners who would like to capitalise on the current low interest rates to minimise the interest payments they make on their current loans," Ms Phang added.
DBS senior vice-president of deposits and secured lending Linda Lee said that most of its customers opted for fixed-rate mortgages in 2010, but that over the last two to three years, more have picked floating-rate packages.
"Consumers need to realise that the best time to lock in an attractive set of long-term fixed rates is during a low interest environment," Ms Lee said.
"Home buyers should remember that during a rising interest rate environment, fixed rates will rise in tandem. In addition, some home owners may not be able to switch to fixed rates in a timely fashion if there is a lock-in period for their existing mortgage programme."
HSBC's Singapore head of customer value management Harmander Mahal said that the bank's Sibor-pegged home loans were "still much more popular" right now among its customers.
The three-month Sibor is expected to remain at around 0.37 per cent for the second half of this year, according to a report this month by HSBC Global Research, though OCBC's head of treasury research and strategy Selena Ling expects it to move up to around 0.39 per cent by the end of this year.
Ms Ling said the rate could also move up to 0.48 per cent by the end of next year, assuming that Singapore's economic output growth improves from 2 per cent this year to 3 per cent next year, and headline inflation stabilises at around 2.8 per cent this year and 3 per cent next year.
UOB's Mr Liew expects the three-month Sibor to be at around 0.35 per cent by the year end and remain below 0.4 per cent for most of next year.
The part of an investor's portfolio that will be most hit by rising interest rates is bonds, analysts said.
Standard Chartered Bank's head of fixed income, currencies and commodities investment strategy Manpreet Gill said investors can minimise the risk from rising interest rates by holding bonds with shorter maturities.
"A bond with a one- to two-year tenor is less sensitive to a change in rates than a bond with a nine- to 10-year tenor or perpetual bond. High-yield bonds offer the biggest buffer to higher rates," Mr Gill said.
Maybank Singapore's regional wealth management head Alvin Lee added that the recent sell-off in bonds "has created some buying opportunities where the higher yields are worth the risk".
"Investors should be very selective and be careful not to be over- exposed to any high-risk areas, and over-leverage in the current environment," he said.
Stocks are also likely to feel some impact from a potential rise in interest rates, analysts said.
"Rising US yields in general reflect an improving economy and are usually positive for risk assets such as equities, high-yield bonds and commodities," said Mr Kelvin Tay, UBS Wealth Management's regional chief investment officer for the South Asia-Pacific region.
He noted that Singapore banks would benefit from rising rates "as they have a large savings and current account deposit base to fund their loans portfolio".
However, he added that stocks with high yields but of low quality, and real estate investment trusts holding poor assets would be most at risk.
Mr Tay said: "In a rising interest rate environment, investors are likely to increase their scrutiny on asset quality."
Citibank Singapore's head of research and advisory Joyce Lim said that rising interest rates will exert downward pressure on asset prices in general.
Ms Lim added that recent mortgage restrictions imposed by the Monetary Authority of Singapore late last month will put a further dent in asset prices.
For instance, Citi expects private home prices to fall 5 per cent over the next 12 months, she said.
Rising interest rates can cause gold prices to go up or down depending on why central banks are raising rates in the first place, Phillip Futures investment analyst Joyce Liu said.
"If interest rates rise because of rising personal consumption expenditure, then that is most likely bullish for gold prices because at the same time, investors will be rushing into gold as a hedge against inflation," she said.
But ANZ commodity strategist Victor Thianpiriya said that in general, a rising interest rate environment is negative for gold prices.
"Gold essentially has no yield. This raises the opportunity cost of holding it," he said. "However, it also depends on the outlook for inflation, which is supportive of the gold price."
OCBC economist Barnabas Gan added that as consumers may put aside more money for savings as interest rates rise, demand for commodities such as gold could be dampened.
Moderate risk portfolio
For an investor with a moderate risk profile, DBS investment communications manager Yeoh En-Lai recommends allocating 52 per cent to stocks, 36 per cent to bonds, 4.5 per cent to alternative investments and 7.5 per cent to cash.
UBS recommends that an investor hold 10 per cent in cash, 25 per cent in bonds, 45 per cent in stocks, 15 per cent in alternative investments such as hedge funds and 5 per cent in commodities.