The sharp market sell-off and subsequent rebound in August marked the start of a sideways volatile period, which should continue for another one to two months, says DBS Group Research analyst Yeo Kee Yan.
With the Straits Times Index (STI) nearing resistance at 3,416 points, further upside into September looks limited, adds Yeo in a Sept 2 note. “Uncertainty heading to the November US presidential election, Middle East tension [and] data raising concerns on a global slowdown are possible triggers for a weaker September.”
Yeo sees support for the STI at between 3,320 and 3,340 points and 3,268 points. Yeo’s year-end target remains at 3,538 points.
Turning September’s anticipated volatility to opportunity is the theme of Yeo’s latest research note, where he looks past the leaders in Singapore’s stock market and highlights the small- and mid-caps that could benefit from a US Federal Reserve rate cut.
Yeo expects REITs to benefit from more liquidity inflows as the rate cut cycle unfolds. “The anticipated start of the Fed rate cut cycle will likely drive the cut-off yields of upcoming T-bill issues further south. Singapore T-bill holders seeking alternative investments is a liquidity catalyst for rate cut beneficiaries, such as S-REITs.”
The 32 members of the FTSE ST All REITS Index have a combined average daily trading value of $251.48 million based on the past 20 days, says Yeo. “We observed that this is 18% higher than the reading of $212.45 million recorded in mid-August, which was just after six-month T-bill cut-off yield first registered a decline to 3.4%.”
See also: With T-bills’ cut-off yield down 21bps to 3.13%, time to ‘segue’ into S-REITs: Bank of Singapore
According to Yeo, every 10% liquidity from six-month T-bills maturing this August to January 2025 headed towards S-REITs will lift the average daily trading value for the sector by around $64.7 million. This works out to a 30.5% increase compared to the base value of $212.45 million recorded in mid-August.
The total return among four out of the five top picks by DBS’s REITs team — Frasers Centrepoint Trust J69U , CapitaLand Ascendas REIT A17U , Frasers Logistics & Commercial Trust BUOU and Mapletree Pan Asia Commercial Trust N2IU — have outperformed or matched the FTSE All-share REITs Index in the more recent quarter. “These are the sector leaders that benefit most from the liquidity flow in anticipation of the first rate cut,” says Yeo.
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Looking farther, this rise in liquidity should expand to small- and mid-cap REITs with higher yields and financial and operational stability, such as LendLease REIT and Keppel REIT, he adds.
Yeo believes the rate cuts should also benefit property stocks with “value-unlocking initiatives”, such as Hongkong Land and UOL.
Finally, stocks with higher gearing and strong earnings growth, including Sats and ST Engineering, could also stand to benefit.
In addition, Yeo believes the current share prices of ComfortDelGro C52 , Grand Venture and Japfa UD2 have yet to reflect their growth prospects following the release of their latest quarterly results. “These three stocks’ double- to triple-digit earnings growth for FY2024/2025 should feature favourably as overall STI earnings growth slows from 8.6% in FY2024 to 4.2% next year.”
On the flipside, Yeo sees a window to take profit on stocks trading close to their fair value estimates, with market sideway volatility likely to persist over the next couple of months.
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“OCBC and SIA are two stocks with limited catalysts, “hold” recommendations, limited upside to target price and slowing or negative earnings growth this or next year,” writes Yeo. “Other profit-taking candidates are Keppel DC REIT, with further yield compression to below 5%; and overseas-focused REITs like Keppel Pacific Oak US REIT, Prime US REIT OXMU and Elite UK REIT, [which are] running ahead of fundamentals.”
Tables: DBS Group Research
