The Federal Reserve's rate hike wave is coming: Challenges and opportunities for Taiwanese investors

The Impact of Rate Hikes Continues to Spread, Taiwan Assets Face Reshaping

Since the start of the rate hike cycle in March 2022, the Federal Reserve has cumulatively raised interest rates by 20 basis points, pushing the benchmark rate from near zero to over 5%, a historic high. The reason this round of rate hikes has garnered so much attention is due to its aggressive pace: the Fed has increased rates at every one of the 10 consecutive FOMC meetings, even creatively raising rates for four consecutive months in mid-2022, each time by 75 bps. The driving force behind this is the US inflation rate reaching a 40-year high in June 2022.

Looking ahead to 2024, market expectations are focused on whether the Fed will continue to adjust its policy. Although inflation is on a downward trajectory, it remains above the 2% target, and banking system risks cannot be ignored. According to CME futures market expectations, the Fed may gradually cut rates in 2024, with an estimated total reduction of 100 to 150 bps for the year.

Heavy Pressure on the New Taiwan Dollar

The most direct impact of rate hikes is reflected in the foreign exchange market. When the US raises deposit interest rates, foreign capital rushes to buy US dollars for returns, leading to US dollar appreciation. The US dollar index rose by 8.5% in 2022, while the Taiwan dollar depreciated by 11% against the US dollar during the same period.

This chain reaction of depreciation cannot be ignored. Taiwan’s imported goods are priced in USD, so the NT dollar’s depreciation directly pushes up prices. For example, essential consumer goods saw a 6% increase in Taiwan’s CPI in 2022, with eggs soaring by 26%. The reason is rising import feed costs, as corn, sorghum, and other feed ingredients are mainly imported from the US (accounting for 22.8% of Taiwan’s agricultural imports).

To counteract the currency depreciation, Taiwan’s central bank also started raising interest rates, cumulatively increasing by 75 bps. However, relative to the Fed’s substantial rate hikes, Taiwan’s rate increase is more moderate, making it difficult to effectively halt the NT dollar’s downward trend.

The Logic Behind Stock Market Pressure

The impact of rate hikes on the stock market is clear. There are two main mechanisms: first, higher interest rates directly lower corporate valuations—since financial asset pricing is inversely related to market interest rates, higher rates mean lower valuations; second, increased financing costs weaken corporate profits.

Data speaks volumes. In 2022, Taiwan’s weighted stock index fell by 21%, ranking among the bottom six globally. During the same period, the S&P 500 declined by 17%, and the Nasdaq dropped by 30%. Capital outflows became a key driver, with Taiwan experiencing a net outflow of $41.6 billion in 2022, ranking first in Asia.

In 2023, the stock market began to rebound, as the rate hike cycle entered its late stage, with market expectations shifting toward rate cuts by the Fed, and risk sentiment gradually recovering. This reminds investors that rate hikes are not the only factor influencing stocks; policy expectations turning dovish often bring strong rebound opportunities.

The Contrasting Logic of Financial Stocks and Gold

Not all assets are harmed by rate hikes. Financial stocks, on the contrary, benefit from rising rates—widening the interest margin boosts bank profits. For example, Taiwan Cooperative Bank (2834) reported interest income of NT$33.3 billion in 2022, up 38% year-over-year, with its stock price rising nearly 20% in recent years. Similar opportunities exist in insurance and other financial sectors.

Gold’s relationship with interest rate expectations is inverse. When markets anticipate the Fed will intensify rate hikes, gold prices face downward pressure; but once expectations shift toward rate cuts, gold often rallies. In fact, gold continued to decline until the end of 2022, but since then, it has steadily risen, mainly because markets began to digest the possibility of rate cuts.

Investor Strategies

In the face of the complex impacts of rate hikes, ordinary investors can adopt the following strategies:

Strategy 1: Go long on USD directly
Rising interest rates drive the US dollar higher, making investing in USD the most straightforward way to profit. Besides traditional currency exchange, investors can also participate via futures or CFDs, which offer leverage up to 200 times, suitable for quick position building with small capital.

Strategy 2: Optimize stock allocation
Reduce holdings of high-valuation stocks (especially tech stocks), and increase exposure to high-dividend-yield assets, with financial stocks as a top choice. Using ETFs can reduce single-position risk and allow more flexible portfolio adjustments.

Strategy 3: Use hedging tools
Hedge against declines in Taiwan stocks by shorting US indices like the Nasdaq 100. Since Taiwan’s stock market is highly correlated with the Nasdaq, establishing moderate short positions can effectively offset portfolio losses.

Grasp the Rhythm of the Rate Hike Cycle

The impact of rate hikes evolves with policy pace. Historical experience shows that the late stage of a rate hike cycle often harbors opportunities—when the Fed approaches the end of its rate hikes and market expectations shift toward rate cuts, previously suppressed assets may experience a sharp rebound.

Therefore, investors should understand the mechanisms of rate hike impacts thoroughly and adjust their positions flexibly—balancing risk prevention with opportunistic moves. Rate hikes are not the end but a window for rebalancing assets.