Lessons on stock, foreign exchange and debt layout under the environment of interest rate cuts
Written by: Yang Mingfeng
The interest rate hike cycle has come to an end. The US Federal Reserve (Fed) has turned dovish and hinted that it will cut interest rates by 3 percentage points (0.75 percentage points) in 2024. This move made the stock and bond markets soar! Where will the investment opportunities be in 2024? Can investors still get stuck in the market and wait for interest rate cuts to ignite the bond market?
Li Qizhan, a foreign exchange expert nicknamed “Big Buddha” and has long been observing general economic trends and exploring opportunities, has the following investment priorities and views for 2024:
The first is that U.S. interest rates, which affect the economy and financial markets, are entering a transition period from rising to falling. From his observation of market conditions during the same period in the past, he found that 3 to 6 months before the Federal Reserve starts to cut interest rates, the stock market usually has a period of decline. Wave Celebration Quotes. If the market predicts an interest rate cut in March 2024, then the stock market surge from the end of 2023 to the first quarter of 2024 is likely to be the last party before the interest rate cut. Next, investors will pay close attention to the reasons for cutting interest rates.
The reason why the US Federal Reserve started to raise interest rates in 2022 is to combat the high inflation sequelae caused by unlimited quantitative easing during the epidemic. Therefore, if it wants to cut interest rates in 2024, it will only be due to cooling inflation and a weakening economy. Li Qizhan pointed out that if the interest rate cut is mainly due to successful suppression of inflation, it means that the economic problem is not serious, and the stock market will maintain a relatively strong performance; but if the interest rate cut is due to economic problems, the stock market will collapse after the carnival.
Stock Market》You should take profits on rallies when interest rates are cut
Hard Landing Risk Declines Reinvest
Although the Federal Reserve has revealed that the U.S. economy will normalize and move towards a soft landing in 2024, due to the violent U.S. interest rate hike this time, the consequences of the impact on the economy may not yet be revealed one by one. Historically, the U.S. bond yield curve has inverted. It is always difficult to escape a recession. Therefore, some Wall Street investment banks predict that the United States will fall into a severe economic recession in early 2024. Therefore, there are still certain risks in the stock market.
“When the economy has a soft landing, don’t be too pessimistic about the stock market. There will be a rebound wave that gives investors the opportunity to profit and exit. However, once a hard landing occurs, the stock market may soon be revised downwards. Investors should exit as soon as possible to avoid greater losses in the future. Loss.” Li Qizhan said. Judging from the interest rate trend estimated by CME futures prices, if interest rates begin to be cut in March 2024, investors should avoid the stock market first, take profits on highs, and wait until the risk of a hard landing decreases before starting to invest, “at least in the first quarter of 2024.” The third and fourth quarters will be a better time to find the bottom of the stock market,” Li Qizhan said.
Bond Market》Whether the economy is soft or hard landing
Has a high winning rate and is relatively safe
But compared to the stock market, Li Qizhan pointed out: “No matter whether the economy is a soft landing or a hard landing, bonds have a hedging theme and are investment opportunities with a higher winning rate.” When the economy gets worse, the bond market will become stronger; if the economic performance is lukewarm, , bonds are stable fixed income in the allocation. Regarding bond investment in 2024, Li Qizhan used U.S. government bonds as a tool to make suggestions for three types of investors:
1. General investors: Make an allocation of “5 short-term bonds, 5 long-term bonds”. When the United States begins to cut interest rates, short-term bonds are not highly sensitive to prices due to their short duration and have relatively small fluctuations. When they mature, they can obtain returns close to more than 4%. The other part of long-term bonds can make up for the short-term debt. The risk of reinvestment lost after the bond matures.
2. Spread-type investors: By adopting “Long-term Bond 10”, you can make money from the sharp rise in bond prices due to the economic recession and the rush for safe havens. However, the rapid rise in U.S. 10-year Treasury bonds in mid-December 2023 reflected expectations of a rate cut. Therefore, Li Qizhan suggested that before seeing further economic recession, it is best to wait for the U.S. 10-year Treasury bond yield to return to above 4%, which is a relatively safe entry point.
3. Interest-earning investors: plan with “short-term bonds 3, long-term bonds 7” and an investment cycle of about 2 to 3 years. With this configuration, even in the extreme case of interest rates falling to 0, there will still be an average dividend distribution of about 2%, and there will also be capital gains income from price increases.
Currency Market》Expect dollar to correct
The Taiwan dollar is unlikely to weaken
When the economy lands softly, the Federal Reserve may slowly cut interest rates, and the dollar will slowly correct. If a crisis occurs, due to the influx of safe-haven buying, the U.S. dollar will surge higher in the early stages of interest rate cuts, and will be revised downwards after a rapid interest rate cut. Li Qizhan said: “If you think that 2024 will bring a big impact due to this wave of interest rate hike cycles, If the risk is high, then the U.S. dollar is worth investing in early.”
In addition, judging from relevant data such as exports, Taiwan’s economy has already passed its low point and will slowly recover in 2024. In the long run, the chance of the New Taiwan dollar weakening should be small. Observing the daily K-line of the US dollar against the New Taiwan dollar in 2023, it has strengthened from a high of 32.49 yuan to around 31.22 yuan. However, although there is little chance of the Taiwan dollar weakening, it will likely return to around 30 yuan unless the United States quickly cuts interest rates and the stock market falls.
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