Partly, the equity market’s performance depends on the trend of risk-free rates. Short-term rebounds notwithstanding, the trend of risk-free rates has flattened in both the US and Singapore. Singapore’s 10-year Singapore Government Securities (SGS) yield at around 3.4% is more than 100 basis points lower than the US, indicating liquidity in the system.
Lower risk-free a boost to CLINT, CLI
This week, in our story Unearthing Value in Property Stocks and REITs, CapitaLand India Trust (CLINT), a property trust, has emerged as the most undervalued. With global funds’ and strategists’ focus firmly on India, and with CLINT being the most liquid proxy for India locally, its unit price has held up better than the FTSE ST REIT Index.
Although CLINT is at the low end of a three-year price range, its unit price is unchanged y-o-y, and down 8% year-to-date. By contrast, the FTSE ST REIT Index, as at May 29, has fallen 12.2% y-o-y and 10.4% year-to-date.
See also: Straits Times Index shows signs of decoupling from the US by outperforming
Because CLINT’s operations are in India which has a high interest rate regime, the trust lowers its borrowing cost by having a mix of Indian rupee and Singapore dollar borrowings. According to CLINT’s Annual Report 2023, as at end-December 2023, 60% of the Trust’s borrowings were denominated in Indian rupees with the remaining 40% in Singapore dollars. The weighted average interest cost of CLINT’s Singapore dollar and Indian rupee borrowings were 4.2% and 7.7% respectively, with its overall weighted average cost of debt at 6.3% as at December 31, 2023.
CLINT’s income is repatriated semi-annually from India to Singapore. The trust enters into a forward contract monthly to hedge a substantial portion of income. This mitigates the risk of large currency fluctuations in the period before income is repatriated to Singapore.
Elsewhere, CapitaLand Investment’s (CLI) share price has languished for much of 2024. Technically though, the chart pattern looks like a base of sorts. The top of the base is at $2.72, a level that coincides with a secondary downtrend line and the level of the 100-day moving average. Property-based stocks and real estate investment managers have been impacted by lower property valuations. On the other hand, higher risk-free rates have impacted share prices directly through the cost of capital.
See also: Bond market pushes back on Trump's tariffs
CLI’s price breakout could materialise if the next round of inflation indicators are benign, cementing the likelihood of at least two rate cuts by the US Federal Reserve Board this year. A successful breakout would indicate an upside of $3.05, a level not seen since late 2023.
