14 March 2017
Expectations of March Fed Hike Near 100%
  • Expectations of a March Federal Reserve rate hike are near 100% as economic data strengthens. Federal Reserve policy rate decision expected on Thursday, 2.00AM, Singapore time.
  • Cyclical sectors typically have strongest positive correlations to a rising interest rate environment. Singapore banks have generated an average total return of 17.8% (vs STI’s 12.2%) since 8 Nov-16, on the back of strong institutional investors buying activity.
  • Defensive sectors such as REITs are also sensitive to interest rates. The S-REIT Sector currently offers a yield spread of c430bps, higher than the long-term average of c340bps, which may imply that investors have largely factored in potential rate hikes this year.

Strong Data Boosts Expectations of March Fed Hike 

 

Investor expectations of a March rate hike by the US Federal Reserve has risen considerably. According to Bloomberg’s World Interest Rate Probability (based on futures trading data), expectations of a rate hike rose significantly from 52% at the end of February to almost a 100% today (see chart).

 

Rising expectations of a rate hike might be attributed to a comment made in early March, where Fed Chair Janet Yellen stated that “it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect”. Yellen also pointed out that core inflation (excl. volatile food and energy prices) in the US is at 1.7%, vs the Fed’s target of 2%.

 

US economic data continues to strengthen as February’s nonfarm payroll report (released last Friday) showed the creation of 235,000 new jobs, beating expectations of a 190,000 increase (according to Reuters). Unemployment rate also declined to 4.7% in February, vs 4.8% in January.

 

The Fed will hold their Federal Open Market Committee (FOMC) meeting on 14-15 March where analysts expect the benchmark fed funds rates to be raised by 25bps to a range of 0.75%-1.0%. Industry analysts expect three rate hikes over the course of this year. Any decision on a rate hike will be released in a statement by the Fed on Thursday, 2.00AM, Singapore time.

 

Expectations of a rate hike has spiked up since early March

 

Source: Bloomberg World Interest Rate Probability (data s of 13 March 2017)

 

Potential Impact of a Rising Interest-Rate Environment

 

A rising interest-rate environment typically points to improving economic conditions and may have an impact on different equity sectors in the market.

 

Banks, Industrials, and other cyclical sectors typically benefit from an interest rate cycle. Specifically for banks, net interest margins (NIMs) typically increase from higher interest rates. Cyclical sectors also typically benefit as an improving global economy will likely result in an increase in capital spending.

 

Conversely, defensive sectors such as real estate investment trusts (REITs), utilities, and telecommunication services have a history of underperforming. These sectors typically have higher dividend yields and rising interest rates may make these sectors less attractive from an investor’s standpoint. Specifically for REITs, higher interest rates may lead to a rise in financing costs, impacting profitability and the ability to acquire assets.

 

Banks Saw Strong Returns Since November 2016 

 

Singapore banks have an average total return of 17.8% since 8 November 2016, outperforming the STI’s 12.2%. The strong returns are backed by a net buy of S$1.43 billion by institutional investors during the same period (according to SGX data). The three Singapore banks are trading at a price-to-book (P/B) ratio of 1.1x with an ROE of 10.0%.

 

Strong net buying activities in Financials stocks since Nov-16 (S$M)

 

Source: SGX data

 

Beyond rising interest rates, asset quality remains a focus for Singapore banks in 2017. According to Moody’s Investors Service, Singapore banks saw further decline in profitability and mixed asset quality performance in 2016, but expect pressure on credit costs and net interest margins to subside this year, providing support to profitability.

 

The table below details the three banks and is sorted by market capitalisation. Click on each stock to visit its profile page on SGX Stock Facts.

 

Name

SGX Code

Market Cap S$M

Total Return YTD %

Total Return 1 Yr %

Total Return 3 Yr %

P/E

P/B

Dvd Ind Yld %

ROE %

DBS Group Holdings

D05

48,133

10.2

30.5

34.0

11.2

1.1

3.1

10.0

Oversea-Chinese Banking Corp

O39

40,001

7.7

13.8

18.2

11.6

1.1

3.7

9.9

United Overseas Bank

U11

34,997

5.3

19.7

20.8

11.5

1.1

3.2

10.2

Average

 

 

7.8

21.3

24.3

11.4

1.1

3.4

10.0

Source: SGX, Bloomberg & SGX StockFacts (data as of 13 March 2017) 

 

S-REIT Sector Yield Spread & Rate Hike Expectations 

 

Rising interest rates and the steepening of the yield curve typically impact REITs’ distribution per unit (DPUs) due to higher financing costs and may also cap the sector’s price performance.

 

The Singapore REIT Sector is trading at a forward dividend yield of 6.7% (compared to its five-year historical average of 6.4%) with a price-to-book (P/B) ratio of 1.0x (five-year historical average at 1.0x). When compared to Singapore’s 10-year government bond yield, the sector currently offers a yield spread of c430bps, higher than the longer-term average of c340bps (see chart below). As a reminder, the SGX S-REIT Index has declined 4.8% from the peak in September 2016. This may imply that the investment community has largely factored in the rate hike this year.

 

SG REIT Sector yield spread at c430bps

 

Source: Bloomberg

 

According to a report by MAS, S-REITs have also improved their debt profiles – where the weighted-average debt maturity in the sector has increased to 3.5 years, from 3.2 years in 2013. Based on MAS analysis, S-REITs appear well-placed to withstand interest rate hikes as they have used derivatives to convert part of their floating-rate borrowings to fixed rates. Stress tests on S-REITs also showed that their median interest coverage ratio (ICR) remains at a healthy ratio of 4.0 after hedging,even when interest rates rise by 3 percentage points. For more information click here.

 

S-REITs are relatively less levered, having an average net gearing ratio of 33.3%, which is well below the maximum of 45% as set by the Monetary Authority of Singapore (MAS).

 

Investors who would like to invest in REITs for sustainable income and long term capital growth can consider the upcoming NikkoAM-StraitsTrading Asia Ex Japan REIT ETF to be listed on 29 March 2017. The REIT ETF provides a broad exposure to diverse properties sectors across the region (estimated 70% exposure to Singapore listed REITs) and has an indicative net dividend yield of more than 5% per annum.  In a recent retail seminar,  NikkoAM provided some key points on the impact of rising interest rates on REITs:

·         While rising interest rates are a headwind for REITs, most REITs in the Asia ex-Japan REIT ETF have a significant portion of their debts pegged to fixed interest rates (at about 70%)

·         Every 100 basis points hike in interest costs is estimated to have a 2% negative impact on annual earnings and dividends. The impact is spread over several years given that a significant portion of the debt is pegged to fixed rates.

·         Net profit and DPU are more sensitive to top-line growth than a rise in interest expense. It is estimated that every 1% rise in revenue can offset a 7.6% rise in interest expenses.

 

For more information on this new REIT ETF, click here

 

S-REITs Sorted by Gearing Ratio

 

The table below details the 38 trusts and is sorted by gearing ratio. Click on each stock to visit its profile page on SGX Stock Facts.

 

Name

SGX Code

Market Cap S$M

Gearing %

Total Return YTD %

Total Return 1 Yr %

Total Return 3 Yr %

P/B

Dvd Ind Yld %

Cache Logistics Trust

K2LU

725

42.8

2.3

5.5

-7.7

1.0

9.1

Sabana Shari'ah Compliant Industrial REIT

M1GU

479

42.8

22.5

-8.9

-34.2

0.6

7.7

IREIT Global

UD1U

448

41.4

6.5

15.1

N/A

1.1

8.6

Mapletree Logistics Trust

M44U

2,663

39.5

6.8

16.6

28.0

1.0

7.0

Mapletree GCC Trust

RW0U

2,712

39.4

2.6

13.4

40.8

0.8

7.4

Ascott Residence Trust

A68U

1,802

38.9

4.5

8.2

18.5

0.9

8.1

OUE Hospitality Trust

SK7

1,224

37.8

5.1

4.7

8.6

0.9

8.0

OUE Commercial REIT

TS0U

886

37.7

1.4

9.4

17.2

0.7

7.1

Frasers Hospitality Trust

ACV

1,240

37.5

4.6

-1.2

N/A

0.9

9.0

Cambridge Industrial Trust

J91U

744

37.3

7.4

12.8

-1.1

0.9

7.1

Ascendas REIT

A17U

7,119

37.1

12.4

11.2

41.7

1.2

6.3

Soilbuild Business Space REIT

SV3U

664

37.0

1.7

-4.3

7.7

0.9

9.9

Viva Industrial Trust

T8B

752

36.8

4.0

18.1

32.3

1.0

9.0

CDL Hospitality Trusts

J85

1,380

36.6

8.7

16.4

6.2

0.9

8.0

Manulife US REIT

BTOU

743

36.6

3.1

N/A

N/A

1.1

4.2

Suntec REIT

T82U

4,427

36.4

8.3

11.7

24.3

0.8

5.9

Parkway Life REIT

C2PU

1,458

36.2

4.3

8.6

22.6

1.4

5.0

Frasers Commercial Trust

ND8U

1,002

35.9

1.2

7.7

22.7

0.8

8.0

Mapletree Commercial Trust

N2IU

4,235

35.1

8.1

11.1

46.5

1.1

5.6

CapitaLand Retail China Trust

AU8U

1,241

35.1

7.2

7.5

26.1

0.9

6.7

Starhill Global REIT

P40U

1,592

34.8

1.0

3.9

15.5

0.8

6.9

Far East Hospitality Trust

Q5T

1,056

33.1

-0.6

-1.0

-11.7

0.6

7.6

Keppel REIT

K71U

3,385

32.9

2.0

10.0

7.2

0.7

5.8

Ascendas Hospitality Trust

Q1P

843

32.7

6.4

5.2

28.4

0.9

7.1

CapitaLand Commercial Trust

C61U

4,540

32.7

7.3

13.0

23.3

0.9

6.1

AIMS AMP Capital Industrial REIT

O5RU

849

32.3

3.6

6.8

28.4

0.9

8.3

CapitaLand Mall Trust

C38U

6,860

31.8

4.5

-3.0

20.3

1.0

5.9

Lippo Malls Indonesia Retail Trust

D5IU

1,094

31.1

7.8

38.0

26.1

1.0

8.9

First REIT

AW9U

992

30.8

3.7

12.8

46.1

1.3

6.6

Keppel DC REIT

AJBU

1,296

29.7

2.4

19.1

N/A

1.2

4.8

Fortune REIT

F25U

2,961

29.3

-0.8

15.3

91.1

0.7

5.8

Frasers Centrepoint Trust

J69U

1,807

28.3

5.7

5.3

37.1

1.0

5.8

Mapletree Industrial Trust

ME8U

3,010

28.2

3.0

14.4

55.8

1.2

6.8

BHG Retail REIT

BMGU

333

28.0

3.8

-11.6

N/A

0.8

3.8

Frasers Logistics & Industrial

BUOU

1,351

27.8

3.2

N/A

N/A

1.0

1.9

SPH REIT

SK6U

2,464

25.5

2.4

6.4

14.8

1.0

5.6

EC World REIT

BWCU

580

18.8

0.0

N/A

N/A

N/A

2.0

Saizen REIT*

T8JU

15

0.0

-43.1

-24.6

10.6

1.7

N/A

Average

 

 

33.3

3.5

7.8

22.4

1.0

6.7

Source: SGX, Bloomberg & SGX StockFacts (data as of 13 March 2017)

*Saizen REIT announced that it will not proceed with the proposed RTO transaction between the manager and Sime Darby Property Singapore Limited. For more information click here.


My Gateway & SGX StockFacts

cid:image002.jpg@01D007D6.6C0AB060

 

My Gateway

 

SGX’s investor education portal with market, product and investment information and events. Sign up now at sgx.com/mygateway to receive our investment updates and economic calendar.

 

cid:image002.jpg@01D007D6.6C0AB060

 

SGX StockFacts

 

Whether you are seeking new or established companies to invest in, SGX StockFacts can provide you with the information you need to identify and understand the stocks that best fit your investment strategy. Visit now at sgx.com/stockfacts.

www.sgx.com

This document has been published for general circulation only. It is not an offer or solicitation to buy or sell, nor financial advice or recommendation in relation to, any investment product. Advice should be sought from a financial adviser regarding the suitability of any investment product before investing or adopting any investment strategies. While SGX has taken reasonable care to ensure the accuracy and completeness of the information provided in this document, it will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. The information in this document is subject to change without notice.