2022: Inflation, Rising Interest Rate,
and The Shift from Growth to Value
2022 is simply a terrible year for investors. Most investments return for the year are in negative territory and the culprit is high inflation.
We all know what high inflation means to our spending power and it is a cause of concern for both Governments and Central Banks (CB).
One of the tools used by Central Banks to lower inflation is increasing interest rates.
The idea of increasing interest rates is to curb spending which will subsequently help to ease inflation.
Rising Interest Rate
To understand the above point, let’s review the below tweet.
Every time Bank Negara Malaysia (BNM) increase the interest rate or Overnight Policy Rate (OPR) by 25 basis points (bps) or 0.25%, consumers or businesses with loans such as home loan worth RM250,000 will end up paying an extra RM35 worth of interest.
If the loan amount is RM500,000 then the extra interest payment is RM70.
For the year 2022, BNM has increased the interest rate by 1%. In my case, I have a mortgage worth around RM500,000. This means I must pay an extra RM280 (RM70 * 4).
For consumers or businesses with RM1,000,000 worth of loans, they will end up paying an extra RM560.
Since now we are paying more interest, that will leave us with less disposable income to spend or invest in the real economy and this will subsequently affect negatively business earnings and investment returns.
So How Did We Get Here?
A simple definition of inflation is too much money (demand) chasing too few goods (supply).
To understand why there is an increase in demand and a reduction in supply, I have prepared two diagrams.
The first diagram illustrates in general the actions taken by both Governments and Central Banks to increase demand during the Covid Pandemic (early 2020).
The second diagram illustrates the actions taken by Central Banks to reduce demand due to the high inflation economy (end of 2021).
I don’t plan to go into detail as I hope and believe they are self-explanatory.
However, I would like to highlight the effect of interest rates on the investment return of both the Value and Growth sectors.
General Rule: Value vs Growth
Note: Treat the below information as a rule of thumb or guideline and not as fact.
When interest rate is low (to stimulate the economy), consumers have more disposable income to spend, and businesses can take up lower-rate loans to invest for future growth.
This is good for the growth of small and medium enterprises (SMEs) such as the technology sector.
Investors prefer to shift their investments from value to growth stocks during a low-interest rate environment and we investors experienced good returns in these growth sectors from the mid of 2020 till towards the end of 2021.
However, high inflation (more demand, less supply) started creeping into the world economy and central banks started increasing interest rates drastically since the end of 2021.
With higher interest rates, consumers have less disposable income to spend, and this will eventually affect the growth of the economy.
During a period of high-interest rates, investors tend to shift their investments away from growth sectors to recovery sectors such as financial, consumer staples, energy, and healthcare sectors.
Some like to refer to these sectors as value or defensive sectors.
Effect of High Inflation and High-Interest Rate
Below are some of my 2022 investment returns to highlight the negative returns on growth sectors.
Unit Trust Investment
I have been investing in this PeISMF fund since it was launched in 2019.
Back on 30th November 2021, the majority of this fund was investing in the technology sector (34.9%) and the year-to-date fund return was 27.84%. Information is highlighted in green below.
However, one year after on 30th November 2022, the fund was still heavily invested in the technology sector, but the return is -15.77%. Information is highlighted in red below.
StashAway Investment – US Equities
I have been investing in the StashAway General Investing Higher-Risk portfolio since February 2021. The fund has gone through at least 2 to 3 changes since then. Below is the investment return of my portfolio this year, especially for the US equities.
We can observe, both consumer staples and energy sectors are producing positive returns while the small-cap and technology sectors plus financial sectors (to my surprise) are lagging with negative returns.
I would expect the financial sector to perform well during a high-interest rate environment but as mentioned before, use the rule as a guideline and not as a hard rule.
Mid-2021, I had some extra cash on hand, and I decided to join the bandwagon of investing in technology ETFs.
To be honest, I was speculating more than investing and I got it totally wrong.
I have since then cut my losses. The reason is, with a loss of close to 60%, the fund needs to grow around 150% just to break even.
I don’t see it happening anytime soon during this high inflation and high-interest rate environment.
Above are some examples to illustrate how the interest rate can affect our investment returns.
I came across the below tweet and I think it illustrates well the difference between value and growth stocks.
During low-interest rates (2020 – 2021), growth stocks performed well while during high-interest rates (2022), value stocks started performing well.
A part-time Malaysian blogger writing his thoughts online. Interest in both personal finance and economics, mainly the behavior aspect of them. I consider myself Poyo since I do not have any significant credentials in both fields, so readers beware. Thanks for reading.