DBS Group Research analysts Lim Rui Wen, Derek Tan, Rachel Tan, Geraldine Wong and Dale Lai recommend “staying nimble” when investing in Singapore banks and REITs amid prevailing volatile rates.
Contrary to the optimistic outlook on declining global rates, the reality of “sticky” inflation prints and increasing macro uncertainties have dampened such expectations. Instead of six planned rate cuts at the start of the year, the market is now anticipating two rate cuts by the end of 2024, according to Bloomberg.
“With US 10-year yields rebounding to year-to-date (ytd) highs and increasing geopolitical uncertainties due to the recent tensions in the Middle East on top of the ongoing Ukraine- Russia war, this potent mix of sticky inflation and geopolitical tensions will likely drive a ‘flight to safety’ trade,” note the analysts in their April 23 report.
The analysts also anticipate a surprising performance from Singapore banks provided the US Federal Reserve Department (US Fed) holds its rates throughout the whole year, while they expect a decline in distributions for Singapore REITs (S-REITs).
“While DBS economists have adjusted rate cut projections to two through 2024 recently, we look at extreme bear case scenario of zero rate cuts instead and its possible implications,” explain the analysts.
“While interest rates have peaked, the uncertainty surrounding how long the Fed would maintain rates at the current “higher than normalised” level of 5.25% - 5.51%, has caused volatility in recent times,” says the analysts.
For Singapore banks, the analysts anticipate every hundred basis points change in the interest rates applicable to the banks’ major currencies to affect net interest income by sixty to a hundred million on an annualised basis for FY2024.
Within the S-REITs sector, the analysts remain optimistic regarding their forecast of a 2% drop in distribution per unit (DPU) for FY2024 and a 2.3% rebound in FY2025. However, the analysts also acknowledge a potential 3% - 5% decline dependent on a 1% rise of portfolio interest costs, on top of their estimates.
In the meantime, the analysts say they prefer Singapore banks over REITs.
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At the banks’ current share price levels, the analysts believe that their valuations of 1.0 to 1.4 times forwards FY2024 P/BV are relatively “undemanding”, with asset quality remaining intact and concerns of deterioration continue to be unfounded.
With the 6.1% - 6.5% dividend yield of banks being more attractive than the average yield of 6.5% for S-REITs, the analysts anticipate investors to “hide” in the banks currently.
“Within the S-REITs, market movements tend to overshoot/undershoot on the upside/downside. We believe that a share price level to watch out for will be the October 2023 lows, where yield spreads of 3.3% (versus 3.1% currently) meant that majority of risks are priced in,” they note.
The analysts note potential negative impacts from “fully pricing” in the scenario of no cuts.
“Though we hold onto our expectations of rate cuts in 2024, in the scenario of no cuts in 2024, in view of heightened geopolitical tensions, we believe that the markets will likely seek safety in S-REITs, which have relatively healthier financial metrics,” explain the analysts.
Taking these factors into consideration, the analysts state their preferences for retail stocks in Frasers Centrepoint Trust J69U and industrial stocks in Capitaland Ascendas REIT and Mapletree Logistic Trust for their “superior” financial metrics, while the valuations of Mapletree Pan Asia Commercial Trust N2IU prove noteworthy as well.
