How to balance growth and income amid the current rate hike cycle?

Following the Federal Open Market Committee (FOMC) meeting in June, the Federal Reserve (Fed) announced a 0.75% increase to the benchmark interest rate, pushing the target range of federal funds rate from 1.5% to 1.75%. This was the Fed’s third rate hike in 2022. Unsurprisingly, in light of rising inflation, the Fed has started reducing its balance sheet in June. We expect to see further hikes in rates with the federal funds rate possibly peaking early next year.

With high inflation and rising interest rates on the cards, the risk for stagflation has increased significantly. Looking ahead, inflation could eat into corporate profit margins. Meanwhile, impact on liquidity as a result of tightening monetary policies may still be of concern to companies. Coupled with uncertainties such as geopolitical risk, stock markets will likely come under pressure going forward.

Despite these headwinds, it is still possible for investors to capture growth opportunities while protecting against downside risks. Those who are willing to tactfully build a diversified portfolio that spans across various industries, geographies or themes with growth potential may still be able to garner returns amid market uncertainty.

High-dividend stocks are a defensive play

Several sought-after growth stocks have lost much of their gains in recent months, yet high-dividend stocks remained resilient with reasonable valuations. The consistent dividend payouts generated from such stocks can contribute to the overall portfolio returns. In addition, such stocks can serve as more defensive assets during volatile times.

In Asia, high-dividend stocks can be found from sectors such as utilities, consumer staples and real estate. Taking Singapore as an example, Covid lockdown measures were eased in recent months. Up to 75% of employees can now return to the workplace. With more people out and about, shopping centres and office buildings are set to benefit, thereby driving the performance of Singapore’s Real Estate Investment Trust (REIT) sector.

Identify growth stocks from thematic value chains

While short-term pain seems inevitable, historical data shows that long-term investment in the stock market will be less risky than short-term holdings. Investors who purely focus on the current market situation may be missing out on the long-term big picture, and opportunities could well slip through their fingers. For instance, climate change has been a pressing issue and companies that offer solutions to tackling this challenge are expected to invest heavily in this regard.

After taking a deeper dive into the “Environment and Sustainability” investment theme, we note that some companies along the sustainable food and water value chains are defensive in nature and have growth potential. These enterprises are spread across a diversified range of industries, such as water resource management (for example wastewater testing, recycling, infrastructure), agriculture (including biotech, fertilizer, pest control) and food retail (for example sustainable retailers and restaurants). They are less vulnerable to market volatility and have recently outperformed the market. As such, a case stands for these companies to be included in a portfolio for investors seeking for long-term returns.

Opportunities can also be found in companies that enable or cater to changes in consumer behaviour. With the rise of e-commerce, digital transactions have surged and banks are leveraging fintech to roll out digital payment systems that enable easier online transactions for businesses. For most emerging markets, this trend has only just begun. On the other hand, technological trends such as 5G, mobility on demand, electric vehicles, cloud computing and the Internet of Things (IoT), have seen rapid development in recent years. Despite the recent underperformance of the related stocks, it is unlikely that there will be aa reversal in the long-term prospects of these trends.

As such, we are still optimistic about the potential for mass adoption, and investment growth for innovation and new technology-related products. Market adjustments could provide a good opportunity for selective stock purchases. Investors may want to tap into the value chain along the theme of “Innovative Transformation” and pay attention to peripheral opportunities with long-term growth potential.

Gold as a hedging instrument against stagflation

In light of lingering geopolitical risks, commodity prices will likely hover at higher levels for some time. Key exporters of raw materials such as Australia are set to benefit. Gold, which is not as prone to cyclical risks as other commodities, can serve as a hedge against stagflation.

However, we remain relatively cautious about the outlook for stocks and bonds under an uncertain macroeconomic environment. Investors should adopt an agile and diversified asset allocation approach, while actively managing their investment portfolios to achieve a better balance between risk and return.