A must-see for Taiwanese! How does the US interest rate hike actually change your wallet? 2024 Investment Strategy

Is the US about to raise interest rates again? Your TWD is depreciating

This is the right question to ask. Since 2022, the Federal Reserve has raised interest rates 20 times, with the benchmark rate jumping from near 0 to over 5%. How aggressive is this rate hike cycle? In the first four months alone, they increased by 75 basis points consecutively, setting a record. To sum it up: to combat the inflation monster, the US central bank has gone all out.

Will there be more rate hikes in 2024? The market consensus is—highly likely. Although inflation has eased somewhat, it’s still far from the 2% target. Plus, financial stability issues are ringing alarm bells. According to Fed forecasts, there is still room for multiple rate adjustments in 2024.

How do rate hikes gradually drain Taiwanese wallets?

TWD faces depreciation pressure

Simply put: rate hikes → US dollar becomes more valuable → TWD becomes cheaper. Why? Because high interest rates attract global hot money into US banks. When the US dollar index surged by 8.5% in 2022, your TWD-to-USD exchange was clearly at a disadvantage.

Taiwan’s central bank also raised rates, but not as aggressively as the US. In 2022, Taiwan increased rates five times by a total of 75 basis points. It sounds like a lot, but compared to the Fed’s big moves, it’s just a drop in the bucket. The result? The TWD kept depreciating without effective resistance.

Inflation quietly knocking on the door

The most direct cost of TWD depreciation is rising prices. In 2022, food prices in Taiwan increased by 6%, with eggs soaring by an astonishing 26%. You might wonder why eggs are skyrocketing. It’s because feed costs exploded, and main feed ingredients like corn and sorghum are mainly imported.

22.8% of Taiwan’s agricultural imports come from the US. Imported goods are priced in USD, and as the dollar appreciates, import prices rise directly, passing the cost onto your dining table. Simply put: US rate hikes → dollar appreciation → rising import food prices → your food expenses go up.

Capital outflows are happening

Even more alarming is capital outflow. Imagine you are a foreign investor, exchanging $100,000 USD for 2.7 million TWD to buy Taiwanese stocks. You earn 300,000 TWD in a year, feeling happy, but then the TWD depreciates by 11%, and 3 million TWD can only buy back $97,000 USD. When you do the math, you lose money!

So, foreign investors start massively selling stocks and converting to USD to hedge. In 2022, Taiwan’s stock market experienced capital outflows of $41.6 billion USD, ranking first in Asia. When everyone is fleeing, how can the stock market not shake?

Taiwan’s stock market is being ruthlessly squeezed by US rate hikes

US rate hikes deliver a double punch to Taiwan’s stock market.

First punch is indirect: dollar appreciation → TWD depreciation → foreign capital selling stocks → Taiwan stocks fall. In 2022, the Taiwan Weighted Index dropped 21%, ranking sixth from the bottom globally, blood flowing everywhere.

Second punch is direct: Taiwan’s central bank follows suit with rate hikes → local interest rates rise → stock valuations are pushed down. High-tech stocks are hit hardest because they rely on expected growth; with rate hikes, this story no longer holds.

There are still profit opportunities in a rising rate environment, don’t go all-in on losses

Rate hikes aren’t all bad news. Financial stocks are rising against the trend because bank interest margins expand, significantly increasing profits. Take Taiwan Cooperative Bank as an example: in 2022, interest income reached 33.3 billion TWD, a year-on-year increase of 38%, and its stock price rose 20% within a year.

Want to scoop up financial stocks at the bottom? You can buy individual stocks or invest in financial ETFs. This is one of the few sectors where you can still profit during a rate hike environment.

As a Taiwanese investor, what should you do?

First tip: Invest in USD, go with the trend

During a rate hike cycle, USD appreciation is highly probable. No need for complicated operations; you can directly invest in the US Dollar Index. For small investors, CFDs are a smart choice—they require low capital to participate, with leverage up to 200 times, allowing small amounts to enjoy the benefits of USD appreciation.

Second tip: Adjust your stock allocation

Reduce holdings of high-valuation stocks (tech stocks are the hardest hit), and increase the proportion of high-dividend stocks, especially financial stocks. This way, you can avoid the impact of rate hikes and profit from the dividends of financial stocks.

Third tip: Learn to hedge risks

If you don’t want to completely abandon the stock market, you can hedge by shorting the NASDAQ 100 Index. Taiwan’s Weighted Index is highly positively correlated with the NASDAQ, so shorting US tech indices can help offset losses from a decline in Taiwan stocks.

Final words

US rate hikes have a profound impact on Taiwan—TWD depreciation, stock market decline, rising prices—all are happening. But the investment logic is: there are opportunities in crises. By understanding risk avoidance and seizing the investment opportunities brought by rate hikes, you can achieve steady profits during the cycle.

Remember one thing: a reversal often occurs at the end of rate hike cycles. Most rate hike cycles follow this pattern, and current pain points may be the next phase’s opportunities. Master the rhythm—that’s an essential lesson for investors.