The equity macro research team at JP Morgan (JPM), Khoi Vu, Rajiv Batra, Mervin Song, Terence M Khi and Harsh Wardhan Modi, finds that Singapore-focused REITs or stocks with resilient cashflows and leveraged balance sheets stand to gain from declining interest rates.
The team writes in their June 15 report: “While banks will bear the brunt of lower interest rates, we believe the sector could still be supported by resilient yields and strong inflows from domestic funds subscriptions.”
On the Monetary Authority of Singapore’s (MAS) $5 billion equity market development programme (EQDP), the team sees that the inflow could greatly benefit quality mid-cap stocks and stocks with upside potential from asset recycling.
Why Singapore REITs and steady balance sheets?
The Singapore dollar nominal effective exchange rate index’s (S$NEER) consecutive slope reductions, which has fallen by 100 basis points (bps) year-to-date (ytd) has translated into an 80 bps to 100 bps decline in various interest rates such as the Singapore overnight rate average (SORA) and treasury bills (T-bills).
The upside from this, the team at JPM notes, will be best captured by Singapore REITs, due to lowering borrowing costs and their sheltering from factors typically experienced by overseas or trade-exposed REITs such as rising vacancies, falling prices and foreign exchange (forex) loss.
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Another group that Vu, Batra, Song, Khi and Modi see as winners are stocks with leveraged balance sheets, which would benefit from lower interest rate costs.
On the flipside however, they note that broad monetary easing is a significant headwind for Singapore banks’ profitability via lower net interest margins (NIM).
“That said, we remain ‘neutral’ on both sectors due to; yield differential is not significant enough to drive performance, rates/economic outlook remains fluid with impacts from tariffs and trade deals, low rate environment could spur subscriptions in local equity funds, supporting broad market performance,” writes the team.
See also: Keppel DC REIT to replace Jardine C&C in latest STI review
Cycle not due
Importantly, the team does not see interest rates wheeling around soon.
The strength of the Singapore dollar, they note, has been attributed to the hedging flows of US assets held by public and private sector investors.
Singapore’s US equity holdings, as a share of domestic market cap, are an outlier.
“While front-end in rates in particular are seen as low versus our fair value assumptions, with the US dollar index (DXY) outlook remaining weak, there is little to turn yields around in the near term. Hence, JPM forex/rate team remains ‘neutral’ on Singapore dollar rates at this point in time,” writes the team.
Small to mid-cap stocks shifting into a higher gear?
On the $5 billion allocation to local fund managers by 3QFY2025, Vu, Batra, Song, Khi and Modi see funds with higher weighting in small and mid-cap stock will be priotisied, as the group has lagged Singapore’s large caps by more than 30% in the last two years.
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Despite this, they note that a significant outperformance of small to mid-cap stocks versus large caps looks unlikely, due to higher multiples and uncertain profitability, lower liquidity and growth of the group.
“In our view, stocks with a good track record of earnings growth and quality balance sheets would attract additional flows. In addition, opportunities could emerge from stocks trading at a discount on book value,” writes the team.
With this, the JPM team’s top picks include CapitaLand Integrated Commercial Trust(CLCT), CapitaLand Ascendas REIT(CLAR), Keppel DC REIT (KDC REIT), Frasers Commercial Trust (FCT), Singapore Telecommunications(ST), Sea Limited (SE) and Singapore Technologies Engineering(STE).
