The immediate rally for S-REITs in general appears to have encountered resistance. In addition, a minor negative divergence has appeared between price and short-term indicators which may lead to a temporary correction. Since the start of 2024, yields on 10-year US Treasuries have rebounded from a low of 3.78% in the closing days of 2023 to around 3.92% as of Jan 4.
Based on the charts, the CSOP iEdge S-REIT Leaders Index ETF (CSOP iEdge S-REIT ETF) is likely to find support at a tad below 82 cents with the Lion-Phillip S-REIT ETF’s support appearing at around 88 cents. Both ETFs may not be able to move much higher in the next few weeks as strong resistance appears. For the CSOP iEdge S-REIT ETF, resistance is at 90 cents. The Lion-Phillip S-REIT ETF’s major resistance appears at 93 cents.
Both the CSOP iEdge S-REIT ETF and Lion-Phillip S-REIT ETF have similar trajectories with both ETFs rallying since early November. The Lion-Phillip S-REIT ETF is up 16% since its low of 77 cents in November 2023, while the CSOP iEdge S-REIT ETF is up 17.7%.
Based on the technical indicators, the CSOP iEdge S-REIT ETF has the edge in terms of relative strength as it is mildly stronger than the Lion-Phillip S-REIT ETF.
Although there is little to separate the ETFs in terms of their top 10 holdings, Keppel DC REIT has a larger weightage in the Lion-Phillip ETF, while CapitaLand Integrated Commercial REIT, which has rallied around 20% since late October 2023 before easing, has the largest weightage in the CSOP iEdge S-REIT ETF.
Keppel DC REIT has weightage in the Lion-Phillip S-REIT ETF of more than 8%, compared to the 6% weight it carries in the CSOP iEdge S-REIT ETF. Hence, the CSOP iEdge S-REIT ETF may find it easier to stage a breakout compared to the Lion-Phillip S-REIT ETF.
See also: STI’s upside from breakout remains valid as risk-free rates fade, but stay watchful for FOMC
In the last two months of 2023, the rally in the S-REITs was triggered by the Federal Open Market Committee’s (FOMC) decision to hold the Federal Funds Rate in their latest meetings. It appears increasingly that markets are expecting interest rate cuts this year. This would be positive for unit prices of S-REITs as they take their valuations based on the yield spread between S-REIT yields and risk-free rates.
In an update on Jan 4, Alvin Liew, senior economist, UOB Global Economics & Markets Research says: “The key takeaway from the Fed’s minutes of its Dec 12/13 2023 FOMC meeting, was that the US central bank is probably done with the current rate hike cycle but there is no clear indication when the rate cuts will commence in 2024.”
The minutes showed the Fed officials generally stressed the importance of maintaining a “careful and data dependent” approach and “viewed the policy rate as likely at or near its peak for this tightening cycle” and they “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably.”
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Liew points out that the minutes also indicated further optimism among the FOMC participants that the Fed is making “clear progress” about the path of inflation, and there was an expressed willingness to cut the benchmark policy rate in 2024 should the easing inflation trend continue. According to the minutes, “In their submitted projections, almost all participants indicated that reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024”.
However, the FOMC minutes also showed that the interest rate trajectory will continue to be data-dependent. Richmond Fed President Barkin (voter in 2024 FOMC) who was speaking about the economic outlook ahead of the release of the minutes echoed the sentiment of a pushback. He called a soft landing “increasingly conceivable but in no way inevitable” and importantly added that any decision on a Mar 2024 FOMC rate cut is a “long way away”, Liew highlights in his Jan 4 report.
Additionally, geopolitical tensions including shipping disruptions in the Red Sea may impact both costs and sentiment, with any negativity spilling over to equity markets.
