For investors concerned about an increasingly likely US slowdown, they might want to rotate from "crowded" Singapore banks to "fairly unloved" Singapore-listed REITs, which as an asset class has been underperforming because of higher interest rates, according to Nomura.
"US exceptionalism theme has come under much greater scrutiny in the wake of trade and tariffs uncertainty and back-and-forth from President Trump’s
administration," state Nomura analysts Chetan Seth, Anshuman Agarwal and Ankit Yadav in their March 13 note.
Following which, there has been significant repricing lower in US long bond yields by around 48 basis points from as high as 4.79% in mid-January to the latest close of 4.31%.
Historically, in Asia, rising US bond yields have coincided with an outperformance of Singapore banks over Singapore REITS – and vice-versa.
"While a US recession is not Nomura’s base case and thus our economists do not expect the Fed to cut rates, we think the market, in the near-term, may still remain concerned about a potential US slowdown, thereby maintaining downward pressure on rates and consequently on sectors that are perceived by the market to be beneficiaries of high-for-longer rates such as Singapore banks," the analysts state.
"Should US recession concerns build up in a scenario of significant trade tensions leading to a sustained fall in long-end bond yields alongside Fed rate cuts, then Singapore banks may become more vulnerable to sustained underperformance.
"Historically, Singapore banks tend to outperform SREITS when US rates are rising – and vice versa.
With US bond yields rising, the valuation premium measured in P/B of SG banks over SREITS has also expanded.
"However, assuming US recession concerns build up and, with that, US 10-year rates come off, we think there is scope for a tactical outperformance of SREITS over Singapore banks especially in the wake of the solid outperformance of SG banks over SREITS," state the Nomura analysts.
