from JPM
SREITs - A place to hide? Lower much sooner: SG rates down 31% in six months
We anticipate investors seeking “defensive yield” exposures to rotate into S-REITs on heightened recession fears and asymmetric risk reward, with ~15% upside to Sep-24 highs on slowdown concerns when the Sahm rule was triggered, and minimal downside to Apr-24/Oct-23 lows when US bond yields hit 4.5%/5% on higher-for-longer concerns.
Sentiment on S-REITs should improve on a faster than expected 31% fall in 6M SG benchmark rates, with 1M SORA down 100 bps to 2.4%, marking one of the sharpest drops globally. There is further potential for lower rates, as JPM/the Street is expecting two/three Fed rate cuts by end-2025, with our economists highlighting a 40% risk of a US recession this year.
We estimate ~4% upside to S-REITs’ DPU for every 100 bps fall in floating rates and anticipate that S-REITs will revise down borrowing cost guidance. Yield spreads of 340 bps, the highest level since Mar-22 which triggered a rally then, is also supportive.
*Our top picks are Singapore-focused names including CICT, CLAR, KDCREIT and FCT, and selective laggards such as MLT.*
Singapore Equity Strategy - Drive carefully on winding and twisting roads
Shifting narratives regarding the US tariff strategy, growth path, and currency strength continue to reshape the investment landscape in the region. The U.S. 10 year yield have dropped from nearly 4.8% to 4.1% due to slower growth concerns, the lowest level since December. The last three periods (Oct 22 – April 23, Oct 23-Dec 23 and Aug 24 – Dec 24) of decline in yields led to a significant rebound in REITs and outperformance over banks over a short period of time. If US economic data deteriorates further, we should see more buying of Treasuries and potentially a further decline in yields similar to September 2024 (peak recession fears).
*In Singapore, we close our Banks vs. REITs trade by making both sectors Neutral (from OW/UW) and add defensives to our asset allocation by upgrading Consumer Staples to OW.*
We continue to prefer industrial stocks, while we remain selective in communication services. *Our top picks: CICT, CLAR, KDCREIT, FCT, UOB, ST, STE and consumer staples names.*
