Hope this can help some investors put the balance into their perspective and not be paranoid ....
The EDGE Weekend Comment May 31
Are REITs now a bargain?
By Joan Ng
Regional markets continued their slide today on the back of worries about the tapering off of quantitative easing in the US. The Straits Times Index fell 0.7% to close at 3,311.4 points. Meanwhile, the MSCI Asia Pacific Index is headed for its second weekly drop. In fact, the regional benchmark is down 4.8% for the month of May – its first monthly decline since October, according to data compiled by Bloomberg.
Shane Oliver, head of investment strategy at AMP Capital, thinks the share market correction could still continue. But Oliver isn’t overly pessimistic about the decline. “It’s worth noting that the global volatility of the last few weeks has a radically different feel to that seen in each of the last three years,” says Oliver. “This time around there hasn’t been a peep out of Europe and more importantly bond yields have gone up rather than down.”
At its core, Oliver says, the present stock market volatility is about the US Federal Reserve getting close to achieving its aim of getting the US economy back on to a stronger footing. As the authorities try to decide when the US economy can start to be taken off life support, investors are trying to figure out what this will mean in terms of bond yields and high-yield share plays that have benefitted from low bond yields.
“But it’s a far better problem to have than the risk of a return to global recession that hung over investors in the past few years. As a result, we remain of the view that recent volatility is a correction that will give way to a resumption of the rising trend in share markets,” Oliver adds.
Will there be a 1994-style bond crash? Oliver doesn’t think so as “growth is still a long way from booming, spare capacity remains immense, bank lending is still subdued and inflation is low.” He also thinks the market correction will be mild, in the region of 5% to 10%, rather than the 15% to 20% falls seen in 2010 and 2011. “Shares are far from expensive, monetary conditions are likely to remain very easy with interest rate hikes a long way off, and the gradually strengthening global growth outlook points to stronger profits ahead.”
So should investors be looking to load up on some stocks that have seen their share prices decline recently? Tricia Song, an analyst at Barclays Bank Singapore, certainly thinks so. In a report today, Song suggests that the market sell-down of real estate investment trusts (REITs) is premature. “We do not expect the Fed to cut back its bond purchases until 2014, versus the market’s expectation of 2H2013,” says Song. She notes that the FTSE ST REIT Index has fallen 10% from a 52-week high of 890 points on May 15. On average, she calculates that the locally-listed REITs now trade at yields of 6% to 6.2%, implying a spread of roughly 440 basis points against the Singapore 10-year Government Bond.
“We continue to believe that Singapore REITs’ valuations are not expensive,” Song adds. She suggests that investors look at REITs that can grow faster even when interest rates move up. Her top pick at the moment is Keppel REIT. She sees the REIT benefiting from a prime office upturn. Also, Keppel Corp has pared its stake in the REIT. This will improve free float and should help support share prices. Song is also positive on CapitaCommercial Trust because of its office portfolio. And she sees future growth from asset enhancement initiatives on its Six Battery Road and Raffles City Tower properties.
DMG & Partners Research analyst Pang Ti Wee, however, says that the risk in the REIT sector is definitely greater now. “Although we do not expect the global outlook, high liquidity and prolonged low interest rate environment to change in the near term, a closer examination indicated that if any of these factors are to change, it could potentially result in a sell-down in REITs. In our view, given the high sector valuations, the risk-reward profile is less sanguine than before,” Pang says.
Maybank-Kim Eng Research analyst Ong Kian Lin suggests investors hold REITs with defensive portfolios that have upside for distributions per unit (DPUs). Given that analysis shows that retail REITs have the highest DPU growth, Ong currently has “buy” calls on Suntec REIT, CapitaMall Trust and Starhill Global REIT.
