A Must-Read for Taiwanese Investors in the Era of Rate Hikes: How U.S. Rate Hikes Reshape Your Asset Allocation

The Truth Behind the Fed’s Aggressive Rate Hikes

Since the start of the rate hike cycle in March 2022, the Federal Reserve has completed a 20-basis-point increase (a total of 500 bps) in just over a year, raising the benchmark interest rate from near zero to the 5.00%-5.25% range. This wave of rate hikes has attracted attention not only because of its magnitude but also due to its rapid pace—four consecutive months in 2022 (June, July, September, November) each saw a 75-basis-point increase, which is rare in Fed history.

The fundamental reason driving all this is the inflation crisis. In June 2022, US inflation hit a 40-year high, forcing the Fed to take aggressive action. Although inflation has since begun to decline, it remains far from the 2% target, and markets generally expect the US to consider further adjustments in 2024.

USD Depreciation and Rising Costs: The First Wave of Rate Hike Impact

The chain reaction triggered by US rate hikes first manifested in the foreign exchange market. Higher interest rates increased the attractiveness of dollar assets—higher deposit rates encouraged capital inflows into USD, causing the US dollar index to surge by 8.5% in 2022. In comparison, the Taiwanese dollar (TWD) depreciated by as much as 11% against the USD. While Taiwan’s central bank raised rates five times (a total of 75 bps), the magnitude was insufficient to retain capital.

This currency depreciation directly impacted daily life. In 2022, Taiwan’s Consumer Price Index (CPI) for food rose by 6%, with egg prices soaring an astonishing 26%. On the surface, it appeared to be an egg shortage, but the real cause was soaring feed costs—imported corn, sorghum, and other commodities priced in USD. The USD’s appreciation automatically increased the TWD cost of imported goods. Taiwan imports 22.8% of its agricultural products from the US, meaning that US rate hikes indirectly amplified Taiwan’s inflationary pressures.

Capital Outflows and Stock Market Turmoil: Invisible Damages

A more subtle but destructive impact is capital outflow. Imagine investing in Taiwanese stocks with USD, earning profits in TWD, only to find that the depreciation of the TWD erodes most of your gains—this situation forces foreign investors and some Taiwanese investors to sell off stocks and convert to USD for risk hedging.

Numbers tell the story: in 2022, Taiwan’s net capital outflow reached $41.6 billion, ranking first in Asia. During the same period, the Taiwan Weighted Index fell by 21%, ranking sixth from the bottom globally. This is not coincidence but a direct impact of rate hikes through exchange rate depreciation and capital outflows affecting the stock market.

Who Benefits from Rate Hikes? Hidden Opportunities in Financial Stocks

The environment of rising rates is not entirely negative. When the central bank hikes rates, banks’ net interest margins expand—deposit rates for customers rise, but loan rates to businesses increase even faster, boosting banks’ net interest income. Taiwan’s Bank (2834) is a typical example; in 2022, interest income reached NT$33.3 billion, up 38% year-over-year, and its stock price increased by 20%.

This suggests an investment strategy: during a rate hike cycle, reduce holdings in high-valuation stocks like Tech Stocks and increase allocations in financial stocks and high-dividend-yield assets, effectively hedging against asset value declines caused by rising rates.

Investment Strategies Amid USD Appreciation

In response to the US rate hikes and the resulting USD appreciation trend, ordinary investors can adopt the following strategies:

Step 1: Appropriately Allocate USD Assets
Direct investment in USD is the most straightforward way to benefit. Besides currency exchange through banks, tools like futures and index funds can also provide exposure to USD appreciation. The logic is clear—rate hikes push up USD interest rates, making USD more attractive, so holding USD during a rate hike cycle is a basic risk hedge.

Step 2: Adjust Stock Portfolio Structure
Structural adjustments in stock holdings are crucial. Reduce exposure to high P/E stocks like Tech Stocks, as rising rates directly compress their valuations; meanwhile, increase holdings in financial stocks, utilities, and other defensive, high-dividend-yield assets. This is not conservative but a proactive adaptation to the rate hike environment.

Step 3: Use Shorting Tools for Hedging
Taiwan’s Weighted Index and US Tech Stocks are highly correlated. When expecting downward pressure on Taiwan stocks, using short positions on the Nasdaq 100 or similar instruments can partially offset losses from a decline in Taiwan stocks. This is a systematic risk management approach, not speculation.

Don’t Miss the Turning Point of the Rate Hike Cycle

It’s important to note that rate hike cycles often reverse in their later stages. When inflation is gradually controlled and signs of economic slowdown appear, the Fed typically halts rate hikes or even starts cutting rates. Market expectations for the Fed’s policy in 2024 are already adjusting, with some institutions predicting rate reductions within the year.

What does this mean for Taiwanese investors? The USD appreciation benefits from rate hikes may diminish in 2024, and stock market rebounds could be on the horizon. Timing the end of the rate hike cycle—being prepared for policy shifts—can help investors position themselves advantageously.

Summary

The US rate hikes have multi-dimensional impacts on Taiwan: the TWD depreciation raises import costs, capital outflows impact the stock market, but financial stocks and similar assets present opportunities. Investors should actively adjust their asset allocations—adding USD exposure, optimizing stock structures, and utilizing hedging tools—rather than passively enduring the effects of rate hikes. Remember, the rate hike cycle will eventually end; seizing this window for strategic deployment is the hallmark of smart investing.