Market view update
Past taper-rate hike cycle from 2014 to 2017
Straits Times Index (Daily)
Rate hikes and equity markets – Uncertain in anticipation, recovers on news
- What’s new: FED governor Lael Brainard became the 4th official to signal a March rate hike, consensus (source: Bloomberg) thinks there can be 3 to 4 hikes this year.
- Observation from past taper-rate hike cycle from 2014-2018:
- Period of market uncertainty in the lead up to 1st rate hike
- Period of stability and return to positive territory once the interest rate hike cycle starts
- STI bottomed in Feb 2016 shortly after 1st hike, rallied 40% over subsequent 2 years even as FED funds rate rose from 0.5% to 1.75%
- Implication: Equity markets tend to be positive at the start to middle phase of an interest rate hike cycle so long as this is supported by growth
- Applying past cycle observation, we expect the market to be choppy in 1Q22 in anticipation of 1st hike in March; but stabilize and recover beyond that once rate hike cycle starts and inflation pressure seen easing in 2H22
- STI now trades just slightly above 13.2x (ave) 12-mth fwd PE, current support seen at 3180-3200