When the rates goes up...

It is only a matter of time before the US Federal Reserve hikes rates. Everyone is watching Janet Yellen like a hawk (although she has yet to become one) because the impacts of the move distills down to everyone of us. In order not to tip the scales, the rate rise is likely to be gradual. However, here are some of the more pertinent implications for us to be prepared for:

Rise in borrowing costs (mortgage, car loans, credit cards) & savings rates - 

Savers can start smiling again as deposit rates will finally go up. However, the higher cost of funds will have to be compensated by higher borrowing rates for mortgages, car loans, and credit cards.

In Singapore, we have already seen that happening with the 3 month *SOR and SIBOR climbing to 1.405% and 1.075% respectively in August, the most since end 2008.

In light of the rising SOR, banks are already dangling offers to refinance home loans:

Rise in USD + fall in Emerging market currencies and EUR:

This presents a good window to accumulate the USD, which is set to appreciate as rates increase; and sell Emerging market currencies (e.g IDR, THB, MYR, VND), before they drop further when the Fed starts the ball rolling.

The Singapore dollar is already set for its biggest annual loss since 1997, hitting 1.42 to the USD just before the Fed decision. Declining currencies also implies lower asset values for foreign investors, but an opportunity to accumulate assets in emerging markets.

Companies at risk:

Interest payments for low grade debt could rise more quickly. This would increase the burden on ASEAN companies, which have already seen their currencies depreciate, and face higher USD repayments. The extended period (7 years!) of low interest rates have also sustained zombie companies, which might be unable to survive a rate hike. Look out before investing in these companies at risk.

*The Swap offer rate (SOR) is typically used to price corporate loans. A softer Singapore dollar can put upward pressure on local interest rates such as SOR, as investors seek higher yields as compensation for holding the weakening currency; the Singapore Interbank Offer Rate (SIBOR) is the rate at which banks lend to each other, and is used to price mortgages. It usually follows the SOR with a lag.