The inflation outlook has been uncertain throughout 2021, sending tremors through equity and bond markets on a seemingly monthly basis. Forecasts have often failed to provide clarity, see-sawing from rampant hyperinflation, to more recent concerns over deflation’s imminent return in the coming economic cycle. Join Michael Syn of SGX and Teyu Che Chern from Phillip Futures for an objective look at how inflation hedges have been performing, as well as some inflation hedges that investors should have on their radar.
- Assessing traditional inflation hedges (i.e. which investments have proved to be good inflation hedges – gold, commodities, metals, currencies, indices)
- Assessing the wisdom of holding cash in rising inflation
- Assessing whether to invest in sectors of rising interest – ESG-themed investments – Exchange-Traded Funds (ETFs)
Mr Michael Syn is Head of Equities at Singapore Exchange. Mr Syn has management responsibility for SGX equity businesses, serving as CEO of the stock market (SGX-ST), depository (CDP) and futures market (SGX-DT/DC). Prior to this role, Mr Syn led the Exchange’s successful derivatives business in equity, commodity and currency assets. He joined SGX in 2011 with a background in investment banking and investment management. Mr Syn serves on the council of Economic Society of Singapore and the board of Sentosa Development Corporation. He chairs One Faber Group, one of Singapore’s leading operators of a suite of leisure and lifestyle services, anchored around the Singapore Cable Car Sky Network of six stations. He graduated with MA and PhD degrees from Cambridge University and attended the Harvard Advanced Management Programme.
Teyu Che Chern is the Chief Executive Officer (CEO) of Phillip Futures. He oversees the operations of Phillip Futures Singapore and is actively involved in the business and management of other group companies’ derivatives entities in the region.
Q: Would REITS being leveraged be adversely impacted by the expected interest rate increase?
A: (Mooris Tjioe, Phillip Futures Analyst) Theoretically and historically, REITs tend to perform well when interest rates rise. Any impending interest rate rise looks to be underpinned by strong economic growth expectations, which are largely beneficial for REITs.
S-REITs have a rather high leverage limit of 50% – as of April 2020 (raised from 45%), that have given them a larger cash buffer during the pandemic, cash that they can use for higher interest rate payments.
On interest rate hikes and S-REIT performance – a study done by Lion Global Investors found that S-REITs outperformed the STI on 3 of 7 previous rate hikes between 2009 to June 2017, when interest rates were increased on a more gradual basis. Thus, it is far from a foregone conclusion that S-REITs will necessarily be adversely affected by interest rate hikes.
Q: What about US stocks/ETF? Which is best to beat inflation?
A: (Mooris Tjioe, Phillip Futures Analyst) US stocks have tended to rise during periods of higher inflation as well. Discerning what stocks to buy tends to depend on the cause of the inflation – if the inflation is due to an “overheating” economy due to high economic growth expectations, cyclicals, small-caps, and growth stocks tend to continue doing well. If growth expectations are low but inflation continues rising, companies with high pricing power (e.g. those that can raise prices without losing business – such as companies with strong brands) will tend to seem more attractive.
ETFs with these themes are thus similarly expected to remain resilient during periods of high inflation.
Q: With COVID-19 recovery expected, do you foresee that we will still be having the low interest rates that we have been experiencing for most of the last decade?
A: (Mooris Tjioe, Phillip Futures Analyst) In my opinion, a simple determinant to raising rates would likely be the state of the US labour market. Should the US economy reach full employment (the US natural unemployment rate is said to be around 4.5%), the pressure to raise rates would increase considerably, so as to prevent an “overheating” economy.
Several labour market imbalances still exist however, and may see the Fed drag out the rate hike decision even further than it is currently at, at the moment (roughly mid-2022, by some estimates).
Q: Do you think REITs are positive for society, given that they drive up inflation through rents using mechanisms like rental escalation clauses and the pressure to increase yield?
A: (Mooris Tjioe, Phillip Futures Analyst) Certainly you would be right to assume this. I think a simple way of looking at its effect on society is this – if the rate of rental increases are higher than the country’s economic growth year-on-year, it is arguably a net-negative to society.
However, that does not stop REITs from being a good investment instrument for income-seeking investors. Not all REITs are the same, as many newer REITs – such as those launched in China over the past few years for instance, are fulfilling a deep need for infrastructure investment that otherwise would not be met.
Q: Peek into your crystal ball and, to your best effort, how would this inflation play out. Would we overdo things and get into a stagflation situation. What could possibly do that? Does your history hat tell us of a rhyme here? (repeating itself)
A: (Mooris Tjioe, Phillip Futures Analyst) Much of the recent inflation seems to be due to an inflation spike – thanks to supply chains and industries reaching capacity re-opening suddenly after having closed during the pandemic. What history does tell us is that similar to many other economic crises, there tends to be an inflation spike during the recovery phase. As to whether inflation remains persistently high, we feel that the high costs to producers currently seen particularly in China and the USA will put a dampener on economic activity, and actually moderate inflationary pressures in the near-term due to inflation-induced pullbacks.