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iEdge S-Reit Index Weekly Review 22 Apr 24

Hey everyone. We had a rough week for SREITs and I am looking forward to some relief the week ahead (hopefully).

Singapore Real Estate Investment Trust (S-REIT) Sector Developments for the week

The days ahead will be crucial as SREITs report their results for the period ending March 31, 2024. Investors will be particularly focused on how the trusts are coping in the persistent high-interest rate environment. As usual, I expect the market to reward prudent management with less volatility.

US Economic Data

Core Retail Sales/Retail Sales came in much stronger than expected, which definitely caught the attention of the US Federal Reserve. In response, they seem to have adopted an enhanced ‘wait-and-see’ approach, indicating a willingness to wait even longer than before to adjust interest rates. Consequently, market speculation regarding interest rate cuts has cooled, with many now forecasting only one or two cuts for the year. A number of analysts believe that interest rates will remain steady throughout 2024.

The chart above shows of the inverse correlation between the iEdge S-Reit Index (in blue) and the US 10-Year Treasury Bond Yield (in orange). The US 10-Year Treasury Bond Yield increased over the week and the iEdge S-Reit Index dipped sharply, bringing it close to its late 2023 lows.

The yield on the US 10-Year Treasury Bond shows no signs of retreating, reflecting market concerns over a prolonged period of high interest rates.

Singapore Real Estate Investment Trusts (SREITs) are directly impacted by these rates, particularly in terms of their operating costs, including interest payments. Persistent high rates may force trusts to refinance at less favorable terms, potentially increasing costs and squeezing profit margins. SREIT managers might need to explore strategic adjustments, such as securing fixed-rate financing or optimizing asset leverage, to shield earnings and maintain competitive yields.

It’s crucial to recognize that while SREITs may have implemented strategies to minimize the impact of market fluctuations, the short-term outlook for these investments remains influenced by investor sentiment. This sentiment can lead to rapid, sometimes knee-jerk reactions in the market.

For example, late last week, expectations of a prolonged high-interest rate regime and fears of an escalation in the Middle East after Israel retaliated with an attack on Iran sent the SREITs sector tumbling. This was particularly evident when compared to the Straits Times Index (STI), which was much more resilient. This contrast highlights the bearish sentiment towards SREITs.

As investors, it’s important to stay vigilant and consider these reactions as potential risks or opportunities. Understanding the underlying causes of market shifts can help in making informed decisions whether these sudden movements represent a temporary fluctuation or a more significant trend.

Investors usually shift funds towards assets perceived to offer security in uncertain times, which may have lasting effects on the investment landscape, particularly for sectors like real estate that are sensitive to such geopolitical and economic shifts. It is important that we keep ourselves updated on the developments.

The week ahead brings us a number of important US economic data releases, which include:

Flash Manufacturing PMI / Flash Services PMI, which are surveys done with purchasing managers about their opinion on the current business situation.

Advance GDP – Gross Domestic Product (GDP) measures the monetary market value of all goods and services produced within a country. It serves as a comprehensive indicator of economic activity and health, thereby exerting influence on the nation’s currency.

Unemployment Claims, which report the number of individuals filing for government assistance due to job loss, seeking new employment. This figure is a critical indicator of the number of people currently unemployed and seeking support, reflecting the job market’s health and, by extension, the overall economy.

Pending Home Sales – Home sales trigger significant economic activities. The purchase of a house leads to the creation of renovation jobs for construction workers, various subcontractors, and services related to new homeownership, such as utilities, furniture, and more.

Core PCE Price Index – The Personal Consumption Expenditures (PCE) index, while similar to the Consumer Price Index (CPI), specifically focuses on the spending habits of individuals. It measures inflation in consumer goods and services, making it a crucial component of overall inflation analysis. High inflation as indicated by the PCE may prompt a central bank to increase interest rates as a measure to mitigate inflationary pressures.

Revised UoM Consumer Sentiment – Consumer surveys hold significant influence because the sentiment of consumers acts as a leading indicator of economic health. Positive consumer sentiment suggests that the economy is performing well, leading to increased consumer confidence and, likely, higher retail sales. Conversely, cautious sentiment may lead consumers to spend less, anticipating a potential economic downturn.

These US economic data and events contribute to the overall picture of the US economy’s health and guides the US Federal Reserve‘s interest rate policy. It is crucial to stay informed about these developments, as the SREITs sector is highly dependent on interest rate trends for cost management, which affects profits and distributions.

I cannot stress enough the importance of being selective with SREITs investments. Look for those demonstrating prudent cost management and active revitalization of their portfolios as key indicators of potential success. Such trusts usually suffer less during sell offs.

I have increased my weekly investment in the CSOP iEdge SREIT ETF. This strategy allows me to maintain exposure and diversification within the SREITs sector, while also reducing my overall investment cost through dollar-cost averaging. I find this approach particularly useful now, given the bearish sentiment, as selecting individual trusts may expose me to the risk of unexpected downside events.

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