How should Taiwanese investors save themselves under the shadow of the 2023 US interest rate hikes?

The Dilemma in Taiwan During the Rate Hike Cycle

Since March 2022, the Federal Reserve has launched its most aggressive rate hike cycle in nearly a decade. By the end of 2023, the cumulative rate increase was 20 basis points, with the benchmark rate rising from near zero to a range of 5.00%–5.25%. This rate hike pace has been unprecedented—between June and November 2022, the Fed raised rates by 75 basis points four consecutive months, setting a record in over 40 years.

What is the root cause of all this? In June 2022, US inflation indicators hit a 40-year high, forcing the Fed to adopt aggressive measures. Although inflation has eased somewhat, it remains far from the 2% target. Complicating matters further, the banking crisis that erupted in 2023 has cast a shadow over future interest rate policies.

According to market expectations, the Fed may continue to adjust rates in 2024. While the probability of a new round of rate hikes appears to be decreasing, the timetable for rate cuts remains uncertain. What threats does this pose to Taiwan’s economy?

The Transmission Chain of Rate Hikes: From US Dollar Appreciation to TWD Depreciation

What is the primary consequence of US dollar appreciation? Rate hikes increase the return on deposits in US banks, attracting global capital to buy dollars. In 2022, the US dollar index surged by 8.5%, reaching multi-year highs. What does this mean for Taiwan?

The TWD/USD exchange rate faces persistent downward pressure. Although Taiwan’s central bank has raised rates five times, totaling 75 basis points, this is far from enough to counter the Fed’s aggressive pace. As a result, the TWD has continued to weaken—in 2022, the TWD depreciated over 11% against the US dollar.

This number may seem modest, but its impact is profound: An overseas investor exchanged $100,000 for NT$2.7 million to buy Taiwanese stocks, earning NT$300,000 profit. However, as the TWD depreciated significantly against the dollar, NT$3 million could only be exchanged back for $97,000, resulting in a loss. Such large-scale stories of capital outflows have directly triggered capital flight.

Imported Goods Price Increases: Inflation from Overseas Transmission

The second blow from TWD depreciation is inflationary pressure. The US is Taiwan’s most important supplier of agricultural products; in 2022, over 22% of imported agricultural products came from the US. Since international commodities are priced in dollars, the appreciation of the dollar directly raises import costs.

In 2022, Taiwan’s food CPI rose by 6%, with egg prices soaring by 26%. This is not due to market supply and demand imbalance but results from rising feed costs—caused by increased prices of imported corn, sorghum, and other grains. The most direct experience for ordinary people is that their shopping baskets feel heavier.

Stock Market and Capital “Flight”

US rate hikes pose a double blow to the stock market: first, higher interest rates increase corporate financing costs; second, in a high-interest environment, company valuations decline. This hits growth companies and tech stocks hardest.

In 2022, Taiwan’s stock market was among the worst performers globally. The weighted index plummeted by 21%, with capital outflows reaching $41.6 billion, ranking the most severe in Asia. Behind this figure is investor despair over the TWD’s appreciation prospects: rather than holding depreciating currency, they prefer to switch to US dollar assets to hedge risks.

By 2023, the situation eased somewhat. The stock market began to rebound as market expectations suggested the rate hike cycle was nearing its end. This reminds investors of a key fact: a late-stage rate hike cycle often signals a market reversal.

Who Can Benefit from Rate Hikes?

Not all assets decline during rate hikes. Financial stocks, especially banks, tend to benefit from rising interest rates. The widening of deposit-lending spreads results in a surge in banks’ net interest income. For example, Taiwan’s Bank of Taiwan’s interest income reached NT$33.3 billion in 2022, a 38% year-on-year increase, with its stock price rising by 20%.

Gold’s performance is also noteworthy. Contrary to common perception, gold prices are not strongly correlated with rate hikes; what truly influences gold prices is market expectations of future rate directions. Before November 2022, gold continued to decline, but afterward, it entered an upward trend—because the market began to anticipate the end of the rate hike cycle.

The bond market, without question, was hit hard. Rising interest rates caused bond prices to fall. The 2023 banking crisis was partly due to this: banks held large amounts of bonds, and rate hikes caused paper losses. Under customer withdrawal pressures, banks had to sell bonds at a loss.

Investment Strategies During the Rate Hike Cycle

In response to the shocks brought by rate hikes, investors generally consider the following strategies:

Strategy 1: Allocate to US dollar assets

The long-term logic of US dollar appreciation is clear. Directly investing in USD is the simplest way to hedge against TWD depreciation risk. Traditional currency exchange at banks is feasible, but for investors seeking more flexibility, derivatives like CFDs offer more possibilities. These tools allow participation in the USD appreciation with smaller capital, but require careful risk management.

Strategy 2: Selectively invest in financial stocks

Rather than passively suffering stock declines, it’s better to actively allocate to sectors benefiting from rate hikes. Financial stocks with high dividend yields and growth driven by rising interest rates are defensive choices before a rate cut. Many Taiwanese banks and insurance companies offer relatively stable cash returns.

Strategy 3: Index hedging

Taiwan’s stock market is highly positively correlated with US tech stocks. By appropriately shorting indices like the Nasdaq, investors can hedge against declines in Taiwan stocks, reducing overall portfolio volatility.

Strategy 4: Rebalance holdings

The key is to reduce allocations to high-valuation, high-growth stocks and increase weights in low-volatility, high-dividend-yield assets. This is not about completely exiting the market but dynamically adjusting risk exposure.

Variables and Opportunities in 2024

Market expectations at the end of 2023 indicate that the Fed’s rate cut is approaching. Once the rate hike cycle reverses, previously suppressed assets—especially tech and growth stocks—may experience a recovery rally. The TWD may also rebound.

However, risks also exist. Geopolitical tensions, recession risks, and other black swan events can suddenly alter policy expectations. Investors must recognize that the rate hike cycle is a marathon; early entry and position management are equally important.

Final advice: a late-stage rate hike often signals a trend reversal. When despair is at its peak, opportunities often begin to emerge. Mastering the rhythm can help you find light amid the shadows of the 2023 US rate hikes.