How will the 2023 US interest rate hikes impact Taiwan's economy, and how should investors respond?

Review of the US Rate Hike Process

Since the start of the rate hike cycle in March 2022, the Federal Reserve has cumulatively raised interest rates by 20 basis points, with the benchmark rate rising from near 0% to the 5.00%-5.25% range. This round of rate hikes is considered one of the most aggressive in history, with the Fed raising rates at every one of the ten FOMC meetings, including four consecutive months of 75 basis points increases in mid to late 2022. All of this was driven by the pressure from the US Consumer Price Index reaching a 40-year high in June of that year.

Entering 2023, although signs of inflation easing have appeared, the target of 2% is still far off. Coupled with concerns over financial stability triggered by mid-year banking sector turmoil, markets are full of expectations for possible rate cuts in the second half of 2023.

Why is Taiwan the hardest hit? Chain reaction of currency depreciation

When the US dollar appreciates, the New Taiwan Dollar (NTD) depreciates relative to it. This trend has been especially evident in 2023, with the NTD continuously weakening against the US dollar. The most direct consequence of currency depreciation is the rise in import prices.

For example, in 2022, Taiwan’s consumer price index (CPI) for food rose by 6%, with egg prices surging by 26%. The fundamental reason is rising feed costs, as raw materials like corn and sorghum in feed are almost entirely imported, with US agricultural products accounting for 22.8% of Taiwan’s imports. As the US dollar appreciates, the prices of imported goods denominated in USD also rise, eventually passing through to consumers.

To counter the NTD’s depreciation, Taiwan’s central bank has also raised interest rates five times, totaling a 75 bps increase. However, compared to the Fed’s力度, the measures taken by Taiwan’s central bank are limited and difficult to effectively prevent the NTD from falling.

Invisible crisis: Capital outflows

The depreciation of the NTD also triggers a more hidden risk—capital outflows. Imagine you are a foreign investor, exchanging $100,000 for 2.7 million NTD to buy Taiwanese stocks, earning 300,000 NTD in a year. But if the NTD depreciates by 11%, that 3 million NTD can only be exchanged back for $97,000, resulting in a loss.

Faced with exchange rate losses, many investors are forced to sell stocks to convert to USD for “hedging,” creating a vicious cycle. According to statistics from the Taiwan Stock Exchange, in 2022, Taiwan’s stock market experienced capital outflows of $41.6 billion, ranking first in Asia and accounting for over 70% of net outflows across Asia.

The double blow of US rate hikes on Taiwan stocks

The impact of US rate hikes on Taiwan’s stock market comes from two directions. First, as mentioned above, the appreciation of the US dollar causes capital outflows that directly impact the stock market. Second, the Fed’s rate hikes lead to higher domestic interest rates in Taiwan, causing corporate valuations to decline accordingly.

Data from 2023 clearly reflect this—Taiwan’s weighted index fell by 21% in 2022, ranking sixth from the bottom globally. Although there was a rebound in 2023, volatility remains high.

Who profits from rate hikes? Opportunities in financial stocks

Not all stocks decline during rate hikes. Financial stocks, especially bank stocks, often benefit from rising interest rates. The reason is straightforward: rate hikes expand the interest margin banks earn on deposits and loans, directly increasing profits.

For example, Taiwan Cooperative Bank’s interest income reached NT$33.3 billion in 2022, a 38% increase year-over-year, and its stock price rose by over 20% in the following year. Besides direct holdings, investors can also participate through financial ETFs.

Three major investment strategies under the 2023 rate hike environment

First, invest in USD riding the rate hike momentum

The appreciation of the USD is the most direct result of rate hikes. Ordinary investors can participate through bank currency exchanges, futures, or contracts for difference (CFDs). For small-scale investors, CFDs offer high leverage (usually up to 200x), making them an efficient tool to enter the USD appreciation trend.

Second, adjust stock allocation structure

During a rate hike cycle, it is advisable to reduce holdings of high-valuation stocks (especially tech stocks), and increase allocations to high-dividend-yield stocks, particularly financial stocks, to hedge against downside risks while earning stable income.

Third, hedge by shorting indices

Since Taiwan’s stock market has a high correlation with the Nasdaq 100 Index, shorting US tech stocks can effectively offset losses from Taiwan stocks’ decline. This is a common risk management strategy used by institutional investors.

Conclusion

The 2023 US rate hikes have caused comprehensive impacts on Taiwan’s economy—from NTD depreciation, rising import prices, to capital outflows and declining valuations. All these issues are interconnected. However, within the crisis, there are also opportunities. By understanding the characteristics of the rate hike cycle and flexibly adjusting investment portfolios, investors can turn challenges into gains. Remember, the rate hike cycle will eventually reverse, and timing the transition well often determines the final investment success.