#whatstrending feat. Phillip Securities (a member of PhillipCapital)

Ever wondered what is currently driving the local and regional markets? #whatstrending is a new series addressing some of the most trending questions/topics on the markets for investors. Designed to be educational, expect to get factual information on what is driving sectors and stocks listed on SGX, featuring insights from professionals in the community.

Today, we hear more from Phillip Securities’ Dan Chang, Trading Representative/Remisier and SGX Academy Speaker, as he shares his thoughts and views on how investors can ride the Rate Cut "theme"

Q1:  As an investor, what stands out to you the most during this period? 

From Dan Chang, Trading Representative/Remisier at Phillip Securities:

Looking back, the global stock markets had been very volatile in the last two months. For most part of the year, we have seen the global markets rallying to new highs. And it wasn’t until the 2nd half of July where we started to see corrections on the AI-theme stocks, followed by US recession concerns in early August, which had sent global markets plummeting. For most part of the rest of August, we had once again seen some good rebounds before consolidation sets in. Till date, we are still facing uncertainties in the stock market, ranging from a potential breakout of Mpox, to continued US recession fears, to the still-ongoing Middle East crisis, a stall in the AI-fueled rally, and also the uncertain impact from the US presidential Election. However, I think most would agree that if there is one theme that investors can confidently bet on, it would likely be the Rate Cut “Theme”. After weeks of US economic data suggesting cooling inflation, in a speech at the Jackson Hole Symposium held on the 23 August 2024, Federal Reserve Chairman, Jerome Powell had finally given the clearest indication yet that a rate cut is forthcoming. In his own words, "The time has come for policy to adjust … The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks." ~ Fed Chair, Jerome Powell

Q2:  What would happen to REITs if there was a rate cut?

From Dan Chang, Trading Representative/Remisier at Phillip Securities:

In the midst of these uncertainties, and with a highly-expected rate cut scenario in mind, REITs are potentially a beneficiary. In a general sense, REITs, by regulations, would be required to pay out at least 90% net earnings to unitholders, while maintaining a leverage ratio (also known as Gearing) of below 50%. As such, bank borrowings form a big part of REITs’ capital management. With a highly anticipated rate cut on the horizon, it will potentially reduce the cost of borrowing of REITs, especially those who have a higher portion of their debts on floating rates, and those who have refinancing needs. 

From 2022 - 2023, we have probably seen one of the most aggressive rate hike cycles in history, where the Federal Fund Rates rose from 0% - 0.25% to a high of 5.25% - 5.50% in a short span of 16 months. During that period of time, prices of REITs were badly battered due to concerns of increased cost of debt, which subsequently would impact the dividend payout. While there had been some optimism on rate cut hopes since the turn of the year in 2024, US economic data pointing to sticky inflation has sort of delayed that expectation until now. And as mentioned, Powell had given one of the clearest signals of a rate cut in September, the expectation of a strong rebound in REITs is high. And as the largest REIT market in the Asia-Pacific region, 
excluding Japan, where else could be better than Singapore to gain exposure to REITs?

That said, I have to preface that aside from a potential rate cut scenario, the performance of each individual REIT is also dependent on their individual company-specific news event and fundamentals. However, not all retail investors have the time or expertise to do their research and due diligence on the many good individual REITs traded on SGX. So what can investors do if they still want to ride on this rate-cut “theme”?

Q3:  How can an Investor gain exposure to REITs?

From Dan Chang, Trading Representative/Remisier at Phillip Securities:

Well, investors can consider Exchange Traded Funds (ETFs for short) that track the S-REIT sector. So what are ETFs? In short, ETFs are investment funds that seek to track the performance of a specific underlying index, and in the case of a S-REIT ETF, the underlying index is linked to the S-REIT sector. So S-REIT ETFs allow investors to gain exposure to the Singapore REITs sector through a single investment instrument. Investing in a particular S-REIT ETF is akin to buying into a basket of REITs that are in the underlying index. 

And there are a few advantages in investing in S-REIT ETFs.

• Firstly, there is price transparency, which is probably much valued by retail investors. ETFs, or for that matter, S-REIT ETFs, are traded just like stocks and shares on the Singapore Exchange. Thus, one can see exactly what price one is buying or selling. And if one is holding on to an ETF, one would know the exact value of one’s holding as long as the stock market is open.
• Secondly, it allows investors to buy into a basket of S-REITs through one single investment instrument. This is particularly beneficial to beginners and/or busy working investors who may not have the expertise nor the time to do their research on the individual REITs.
• Thirdly, S-REIT ETFs are index tracking funds. Thus, they are mostly passively managed. Meaning, the fund managers are not actively involved in selecting REITs for the ETFs. Instead, they seek to duplicate the weightage of the REITs in the underlying index that they are tracking. As such, ETFs tend to have lower expense ratios.

While ETFs have been trading on the SGX for a long time, REIT ETFs actually made their debut in 2016. Presently, there are five REIT ETFs that are trading on the SGX. They are:

For more insights from Dan Chang, join his telegram channel https://t.me/dandailystocks

Click here to read the full article from Dan Chang

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