Switching Gears, But Don’t Forget the Brakes
Whilst, we are seeing a collective shift globally to a risk-on approach against expectations of higher earnings and a global economic recovery – investors should not neglect to also stack-up on defensive asset-classes, should markets come to an unruly end.
Asian REITs are such possible defensive asset classes, particularly Singapore REITs (S-REITs) – as they continue to perform well and offer one of the most attractive yield spreads (Dividend Yield – 10Yr Bond Yield) at 4.4% in the region.
More distribution per unit (DPU) upside is also seen from further asset rejuvenation projects, redevelopments and a consolidation theme in the industry.
Limited Impact Seen From Rising Interest Rates
In 2016, S-REITs outperformed the broader STI index, rallying by over 11% until Sept’16, as prior expectations for interest rate hikes were dialled back due to key risk events that occurred in 2016 like Brexit, a further correction in crude oil prices, and persistent negative interest rates in Europe and Japan.
However, with improving economic fundamentals, as well as anticipation of further pro-growth policies under the new Trump administration – we saw interest rate expectations starting to pick-up again.
Taking these cues, the Fed raised rates by 25bps in its Dec’16 FOMC meeting – causing equity markets to rally overall post US-elections, as funds ploughed back to riskier assets. Consequently, we saw a correction in prices of REITs.
Generally, REITs do not perform well under an environment of rising interest rates. As US Treasury rates rise, the yield differential (or yield spread) between US Treasury bonds and REITs will narrow. Thus, REITs will appear less attractive, as investors will now seek higher yields to offset the risk taken for REITs compared to treasury bills which are considered risk-free.