iEdge S-Reit Index Weekly Review 8 Oct 24
Good day everyone!
How have you been? Did you participate in the SREIT recovery? In my previous review, I cautioned about possible volatility, given the still high interest rates from the US Federal Reserve. Rate cuts take time to trickle down into the markets, affecting investor behavior and asset performance.
SREIT Performance and Outlook
- Strong Q3 Performance: REITs recorded impressive gains in Q3 2024, buoyed by positive investor sentiment surrounding potential interest rate cuts.
- Positive Outlook for Continued Growth: Analysts predict further rally potential for REITs, citing attractive yield spreads compared to global peers. Lower borrowing costs, potential earnings growth, and strengthened balance sheets further contribute to this positive outlook.
Notable Acquisitions and Developments
- CapitaLand Ascott Trust: Acquired the 329-room lyf Funan Singapore for $263 million, a move projected to increase distribution by 1.5%.
- Mapletree Industrial Trust: Proposed acquisition of a multi-storey mixed-use facility in Tokyo for JPY14.5 billion ($129.8 million), with expectations of increasing the distribution per unit.
- BlackRock Increases Stake in Capitaland Ascendas REIT: BlackRock Inc. purchased an additional 299,900 shares for $869,710, bringing their total interest in Capitaland to 7%.
Looking at the chart above, you can see the ongoing inverse correlation between the iEdge S-Reit Index (in blue) and the US 10-Year Treasury Bond Yield (in orange). The vertical line highlights where the US 10-Year Treasury Bond Yield reversed direction upwards. This reversal is mirrored by the iEdge S-Reit Index, easing off from the resistance level indicated by the dotted red line.
Strong Economic Data Raises Doubts on Aggressive Rate Cuts
Strong economic indicators flowing out of the U.S. have led to speculations of a less aggressive interest rate cut regime. The U.S. economy added 254,000 jobs in September, marking the largest increase in six months. The unemployment rate also unexpectedly dropped to 4.1%. This robust labor market data could prompt the Federal Reserve to reconsider its approach to interest rate cuts. Although another rate cut is expected at the Fed’s November meeting, the chances of a significant 50-basis-point cut have decreased.
Impact on SREIT Performance
This shift in expectations around U.S. interest rates has significant implications for SREITs. Lower interest rates are crucial for REIT performance because they reduce borrowing costs, which helps boost profitability. The prospect of smaller rate cuts may have dampened investor sentiment toward SREITs. However, this development shouldn’t come as a surprise, as both the economy and markets rarely move in a straight line. Although the situation has improved compared to previous months, nothing is set in stone.
Geopolitical Risks and Market Volatility
Adding to the uncertainty, ongoing conflicts, such as those in the Middle East, could introduce additional volatility and affect global markets. Any significant escalation has the potential to impact investor sentiment and indirectly affect SREIT valuations.
Uncle’s Takeaway
We should prepare for a more volatile environment, given the evolving interest rate landscape and geopolitical uncertainties. In these uncertain times, a focus on long-term fundamentals and prudent portfolio management will be essential for navigating the market’s ups and downs. My preference leans toward SREITs with proven track records of prudent management and strong financial discipline, as they seem better positioned to weather economic shifts and deliver stable returns.
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