With the possibility of a rate cut from as early as September this year, investors should consider increasing their exposure into Singapore REITs (S-REITs) say CGS International analysts Lock Mun Yee, Lim Siew Khee and the Singapore research team.
CGSI economists are anticipating 75 basis point (bps) cuts in 2024 followed by a further 150 bps cuts in 2025. The dovish stance is expected to achieve a terminal rate of 3% by the start of 2026.
While S-REITs have returned a positive 3.2% since the end of June on the back of rate cut expectations, the analysts still see room for growth. This is underpinned by the continued widening of yield spreads versus the 10-year government bond yield, which has been dropping in tandem with the rate cuts, they write. The analysts also see potential earnings upside as funding costs lower and inorganic growth opportunities pick up the pace, as well as improvements in balance sheet metrics such as gearing and interest coverage ratios (ICRs).
As at the analysts’ report dated Aug 30, valuations of S-REITs are still “inexpensive”, with the sector trading at FY2024/FY2025 dividend yields of 6.1%/6.4%, representing 340 bps to 370 bps yield spreads over the current Singapore 10-year bond yield of 2.7% and slightly above the long-term average spread of 330 bps.
On a P/BV basis, S-REITs are trading at a multiple of 0.89 times.
“Based on our house view for 75 bp /150 bps Fed rate cuts in 4Q2024/FY2025, we think a potential reversal in the high funding cost could start as early as 2HFY2025,” the analysts note.
“S-REITs with a lower proportion of fixed rate debt and those with a higher percentage of debt due to be refinanced over the next 18 months could be the early beneficiaries,” they add.
Such REITs include Far East Hospitality Trust Q5T (FEHT), Suntec REIT, CDL Hospitality Trusts J85 (CDLHT), Frasers Logistics & Commercial Trust BUOU (FLCT), Starhill Global REIT P40U , Mapletree Pan Asia Commercial Trust N2IU (MPACT) and Lendlease Global Commercial REIT JYEU .
In addition, S-REITs – like FLCT, Keppel DC REIT and Sasseur REIT – which have enough headroom in their balance sheet may also tap on inorganic growth opportunities amid a lower cost of capital and declines in debt cost.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
Although not all REITs are made equal, the analysts recommend investors adopt a more “aggressive” stock-picking strategy to ride on the virtuous interest rate cycle.
That said, they see large-cap REITs being the first beneficiaries from the initial return of fund flows to the sector. “We also see opportunities for laggards to close the share price performance gap due to their more attractive valuations,” they write.
To this end, the analysts have identified CapitaLand Ascendas REIT A17U (CLAR) and FLCT as their top picks. CLAR was selected for its “diversified and resilient” portfolio and healthy balance sheet while FLCT was chosen for its exposure to the “robust” logistics and industrial segment in Australia and Europe, as well as its low gearing. FLCT’s commercial portfolio has also been partly derisked with the partial back-filling of the space vacated by a major tenant.
CGSI has “add” calls for CLAR and FLCT with respective target prices of $3.06 and $1.27.
These companies will benefit from stronger Asean currencies
Asean-based producers such as Japfa UD2 and Wilmar International F34 are likely to see earnings upside with the rebound in Asean currencies against the US dollar (USD).
Asean currencies fell between January 2022 to Aug 1 this year but rebounded by some 5% to 10% against the USD from Aug 1 to 23.
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Japfa is exposed to the Indonesian rupiah (IDR) and Vietnamese dong (VND) as it produces protein in both countries and sells them in their local currencies. Wilmar is exposed to the Chinese renminbi (RMB), IDR and Malaysian ringgit (MYR) as it sells its consumer products mainly in these three currencies while reporting its financial results in USD. Both companies would benefit from positive foreign exchange (forex) translational impact for their revenues.
“The expectations of narrowing interest rate differentials with the USD could favour the appreciation of Asean currencies versus [the] USD,” write CGSI’s analysts.
“This would lead to further appreciation of the Asean-4 (the MYR, IDR, Singapore dollar or SGD [and the] Thai baht or THB) currencies, albeit at varying degrees to reflect domestic growth, inflation and policy rate outlook,” they add. “Our economist forecasts the RM, IDR, and THB appreciating by a further 1%-2.7% versus the USD by end-2025, while the SGD should remain relatively stable.”
Internet companies like Grab and Sea Limited are likely to see positive foreign currency (forex) translation impact in their revenues from the weaker USD as well, the analysts note.
That said, a weaker USD will likely be negative for tech manufacturers which have a net-long exposure to the USD and companies like Riverstone, which sells in USD.
Grab and Sea are exposed to six Southeast Asian currencies while Riverstone is exposed to just the MYR.
Singapore market to benefit on the whole
The Singapore stock market is also tipped to benefit on the whole based on historical data. Share prices across most sectors saw positive performances about one month ahead of the first rate cuts in September 2007 and July 2019 during the Fed rate pivot periods.
“During the 2007 rate cut period, stocks in most sectors turned in a positive return in the one month before and one month after the first rate cut, with capital goods, commodities and financials outperforming. However, over a longer three- [to] six-month duration, most sectors turned in a negative performance, mainly due to the onset of the global financial crisis at the time,” the analysts note.
In 2019, most sectors – except property and telecommunication companies (telcos) – saw positive returns in the one month to the actual cuts, although these returns reversed due to the fear of a global slowdown on the back of China-US trade tensions. However, REITs, tech companies, telcos and Internet firms recovered with positive returns some three to six months after the initial rate cuts due to lowered fund costs and stable rental revenue models.
“As we close in on the upcoming rate pivot cycle, share prices of companies in internet, commodities consumer, transport and S-REITs have delivered positive returns over the past one month,” the analysts observe.
“In the absence of adverse macro events/catastrophes, we think potential beneficiaries of an interest rate turn will be sectors such as REITs and developers and highly leveraged companies, while lowering of the cost of capital on the back of declining interest rates could spur valuations of internet companies,” they add.
Against this backdrop, they also see that the Monetary Authority of Singapore (MAS) may start to signal the easing of its monetary policy in October by lowering the rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER). However, CGSI’s economists still see the path of the S$NEER to be “mildly appreciative”.
The brokerage expects the SGD/USD rate to reach 1.31 by the end of 2024 and 1.30 by the end of 2025.
“We think the narrative for a strong SGD will likely continue. The latest Singapore 2Q2024 GDP numbers point to an improved outlook, helped by the tech upcycle – this has prompted the MAS to revise its 2024 GDP range from 2% - 3% y-o-y to 2.5% - 3.5% y-o-y,” note the analysts.
“With core inflation still above the 2% soft target, we think there is support for SGD to maintain its value as growth remains robust, while there is more room for inflation to ease further. However, once inflation is tackled and with global growth showing the first signs of a slowdown, MAS could be more inclined towards easing the S$NEER appreciation more aggressively, in our view,” they add.
MSCI Singapore
Looking back, the MSCI Singapore index has had a negative corelation of 52.5% with the Fed fund rate trend between July 2019 and August 2024. Given this, the impending interest rate cycle could support Singapore’s stock market performance, the analysts note.
With this, the analysts have upped their MSCI Singapore index target to 329.5 points from 313.35 points by the end of the year. “We believe that the interest rate easing cycle could be supportive of medium-term corporate earnings growth and lower cost of capital,” they write.
As at Aug 30, the Singapore market was trading at an “inexpensive” 2024 P/E multiple of 12.2 times with a dividend yield of 4.7%. The index closed at 323.4 points on Sept 2, 1.95 points higher or 0.61% up.
The analysts like big caps such as ComfortDelGro C52 (CDG), CLAR, FLCT, iFast, Sats, Sembcorp, Singapore Telecommunications Z74 (Singtel), Singapore Technologies Engineering S63 (ST Engineering), Seatrium and United Overseas Bank U11 (UOB). They prefer CSE Global 544 , Hong Leong Asia H22 and Singapore Post S08 (SingPost) among the small caps.
ST Engineering and FLCT replaced Keppel and Yangzijiang Shipbuilding (YZJ) among the big caps while Hong Leong Asia replaced Centurion and Riverstone among the small caps.
CGSI is “overweight” on the capital goods, commodities, construction, gaming, Internet, REITs, tech and telco sectors while it is “neutral” on consumers, financials, gloves, healthcare counters, property and transport stocks.
Technical outlook
The MSCI Singapore index is still on a “corrective mode” despite its strong rebound at the 292 support line, says technical analyst Chua Wei Ren.
“Current price action is seeing a slight weakening and consolidation at the 318.17 resistance level and may see a correction towards 308.00 or lower support at 290.00,” he writes. “Despite the weakness, the index is likely to test the 327.30-330.00 resistance zone.”
