Upcoming US Recession and SREIT Rally From Lower Interest Rate Fallacy.

Wow, this is really bad news! Early US economic data for the first quarter of 2025 is pointing towards negative growth, according to the Federal Reserve Bank of Atlanta. If we have 2 consecutive quarters of negative growth, then techincally, the US would be in an economic recession. What this means is that the probability of two or even more Federal Reserve rate cuts has just increased drastically. 

1. The Call to Buy REITs as Interest Rate Cuts Will Mean Huge Savings in Financing Cost is a Fallacy.

Interestingly, a number of folks on social media have mentioned that now maybe the best time to buy into REITs which have been performing badly and in the doldrums. Nevertheless, it is important to note that a financing cut may not lead to a rally in SREIT market price because the main factor is still whether the REIT can continue to generate sustainable rental income. Many businesses will be severely impacted and there will be increased in bankruptcy from firms and consumers. There will also be widespread retrenchment of staff (which we are already seeing for a number of years).   

Not suprisingly, during past recessions, most of the REITs will have substantial drop in their market price (along with the broad market sentiment) despite a lower interest rate environment. So far, I have not seen REITs price rally in past recessions. Do remember that REITs are still equities afterall and underlying business fundamentals are still the essential determinant of its market price. This is unlike bonds instrument whereby their market price soar when interest rate is being cut- this is the basic 101 inverse relationship of bond price vs the market financing rate.  

2. REITS I Will Try Avoiding During Recession

Personally, I will be avoiding the following REITs sector:

(1) Hospitality REITs- if everyone is struggling with bread and butter, no one will be in the mood for travelling; demand will thus plunge. 

(2) Office Commercial REITs- Too cyclical and unpredictable.

Instead, I think that shopping mall REITs (Frasers Centrepoint Trust and Lendlease REIT) as well as Industrial REITs (backed by Temasek Holdings) will be a safer buy while waiting for the market to recover.  Special theme REIT like strip malls with grocery focused business (United Hampshire US REIT) should also be a safer place to ride out the recession. 

Parting Thoughts

With a narrowing net interest margin spread, bank stocks like DBS, UOB & OCBC will find their earnings dipping soon as they have peaked. SREITs will also be in the doldrum for at least another year or two. So will you folks be making any adjustment to your current portfolios?

SREITS Crashed Again- REITS Or SG Banks More Attractive?

SREIT tumbled down again over the past 2 weeks. Interestingly, I see a number of folks like Josh Tan buying into Mapletree Industrial Trust (“MIT”) or Master Leong strong preference for Mapletree PanAsia Commercial Trust (“MPACT”) to take advantage of the recent “crash” while others like the famous AK71 preferred the local trio of DBS, OCBC and UOB banking stocks as better buy than REITs. For the latter, the local banks are only paying out 50%-60% of their earnings as dividends to shareholders while ploughing back 40%-50% of their earnings into the business which should theoretically keep building up their Net Assets Value and eventually their market price should gradually increase. So it gets kinda of confusing on whether one should buy more REITs during the current downturn for the REITS sector or accumulate more local SG bank stocks given the different opinions of their preferences. 

1. Time to Chiong/Accumulate more SREITs while prices crash and interest rate being slashed gradually into 2025?

Personally, I have mentioned before my thoughts in September 2024 that most of our SREITs are now priced fairly given that we should not expect future interest rate to be near the previous decade of zero interest rate environment. Distribution yield of 5.5% to 6.0% for blue-chips SREITs should be the norm now. Anything that is lower will not compensate for the additional risk premium one undertakes relative to the local risk-free rate. 

MIT’s distribution yield of 5.96% at unit price of  S$2.27 per unit is decent. But I would not say super attractive given that its market value per unit is at a huge premium over its NTA per unit. Since MIT is my second largest holdings already, I did not add on any further.

As for MPACT, while its distribution yield is now at an attractive 6.9% (@ S$1.23 per unit) and its market value per unit is at a large discount over its NTA per unit, the stock market maybe pricing in substantial worsening in distributions from its Hong Kong, China and Japan exposure. Also, its crown jewel of Mapletree Business City seems to be losing its luster. So I guess the usual high risk high reward adage will apply here. It thus depends on which crystal ball you are gleaning into for whether the foray here will reap handsome return or just a lackluster one.

2. Local Banks With Splendid Results Expected Into 2025.

There is no doubt that DBS, UOB and OCBC trio have been having a good run since last year due to the sudden spike in interest rate on their net interest margin and also wealth management business. But if recession comes, bank stocks will also crash and risk of bad debts increase exponentially. I will be staying away from banks for now unless there is a substantial correction in their prices. 

Parting Thoughts and My Watchlist.

Given the recent developments as aforesaid mentioned, I have been focusing my monthly nibble size investments into Endowus bond funds and Keppel Ltd. I thought that overseas REIT such as Link REIT looks more attractive given its market price is almost 40% off its net book value per unit and giving a distribution yield of 7.6% with 21% leverage ratio.

 

Investment Portfolios Updates (29 Sep 2023) - S$551K and Projected Annualised Passive Income of S$51K.

The stock market continued its horrendous game of Yo-yo with the US Federal Reserve threatening more interest rate hikes and the stock market tanked with the news earlier this week. Even the bond market is not spared. So buy equities or buy bonds one will still get whacked hard these days. September 2023 has been a good month as I finally received dividends payout of S$19K which I used to invest in Keppel Corp and also to purchase more balanced funds from Endowus platform. Overall, net asset value stands at S$551K and a projected passive income of S$51K as at 29 September 2023.

(Note: Please also refer to my other Family Portfolio which is projected to yield +S$20K of passive income per annum).

 1. Portfolio 1- Stocks held in SGX Central Depository 

(Note: This portfolio is designed to provide immediate dividends for use as it is under my own CDP account and the dividends credited goes directly to my bank account.)

I have continued investing into Keppel Corp when its prices fall to S$6.75 per share. The much anticipated EGM for Keppel Corp has been announced and it will be held in October 2023. Special dividends in the form of Keppel Office REIT units will be given to existing shareholders once it is approved by shareholders.

2. Portfolio 2- Margin purchased securities

(Note: My margin purchased securities has grown to a sufficient scale to sustain itself and can pay off annual financing charges as well as to gradually pay down the margin loan through dividends generated.) 

(a) I have earlier sold off all my investments in Manulife US REIT ("MUST") in late July 2023 and re-invested the proceeds into Keppel Oak US REIT. No choice but to bite the bullet as MUST is unable to pay out dividends due to a breach of bank covenant and it seems that MUST is entering into its final death spiral;

(b) Additional purchase of 5,000 units of Mapletree Industrial Trust at S$2.22 per unit on 7 August 2023;

(c) Also bought into additional 1,000 shares of OCBC at S$12.22 per share on 22 August 2023 as I think that its management strategy of focusing on growing its wealth management business will enable OCBC to do well for its future;

(d) I have also paid off S$8K of margin loan using dividends received in September 2023 to reduce interest expenses and also leverage ratio.

3. Portfolio 3 (with Tiger Brokers)- Venture into higher risk as well as capital growth stocks here

(i) Sold off all my DigiCore REIT to take profit at US$0.575 per unit. Have bought back 13,000 units when its price began to drop;

(ii) Despite the Manulife US REIT financial woes due to downturn of US Commercial office sector, I have re-entered into this REIT for speculative purpose over 2 tranches at US$0.60 per unit and US$0.45 per unit. Anyway, this is just a tiny stake to earn some spare change for a buffet dinner in the event that MUST management managed to save it. This also reminds me of Barista Fire's recent rather interesting posting on gambling mindset "When Investing Becomes A Dangerous Mistake" ;

(iii) Have also purchased small stakes in US Utility provider Nextera Energy when its price dropped steeply. Also entered into Mercury Systems Inc in US market. Mercury is in the defence technology and equipment sector.

4. Portfolio 4 (Endowus & Other Investments)

(a) I have began investing into the Higher Income Endowus fund that seeks to pay out passive income of 5.5% to 6.5% per annum. This is a combined funds portfolio that is 20% equities and 80% into bonds and recommended by Endowus.

(b) Have also been adding on to the Balanced Fund that I self-created using PIMCO GIS Income Fund, Allianz Global High Yield and Fidelity Global Dividend Fund.  

Summary

I have began building up more exposure to bonds using Endowus balanced funds to further diversify away from my excessive exposure into equities. I believe that bond funds should benefit from capital appreciation next year once the interest rates are being cut by the US Federal Reserve. 

War in Eastern Europe- Time to Sell Off All Stock Investments or Investment Opportunities Arise Again?

I will start off this blog post with some personal updates about myself. The past 2 weeks has been a real struggle for me. Last Monday, while preparing to go back to office, I performed my ART routine as usual and this time round, I was shocked to see a double line. I did not feel unwell except for feeling a bit of itchiness in my throat at that time only. I also became the pioneer employee who became the first staff to contract COVID in my company. Thereafter, all hell broke lose and COVID became rampant in Singapore with daily cases over 15K to 16K. Good news is that it feels like getting the normal flu with a bit of blocked nose and sore throat similar to what the MOH website published 99.7% statistics of people who got COVID will experience mild symptoms. But well, you never know whether you will end up as the 0.3% statistics of severe case that need hospitalization treatment for oxygen or other medical treatments if we take this too lightly.

1. War in Eastern Europe by Russia against Ukraine- Time to sell off investments or Investment Opportunities?
Just coming off the worldwide interest rate hike crisis which hits stocks badly, we now have another crisis coming out of Eastern Europe. Russia has decided to invade Ukraine. The Singapore Stock market plunged on 24 February 2022 (Thursday) with the short announcement by Putin (who increasingly seems to be behaving a lot like the previous dictator Joseph Stalin of the Soviet Union) that Russia will be launching a "military operations" against Ukraine. I think that this is just playing with words. An invasion and war is what it is. Let's call a spade a spade. 

It is interesting to see their ally China being placed in an awkward position with their foreign affairs ministry also trying to label this invasion as a "military operations" instead of an ongoing war in order to show solidarity behind Russia.

So is it now the time to sell off all stocks to avert the current market instability and further downsides?

2. Time to sell off all stock investments?
My usual thoughts are that it is very difficult to time the market. While the initial shock will typically cause the stock markets to sink into the red, the stock markets will eventually recover. I only did some minor sell off during the past few days to capitalize on stocks which have dropped significantly. No point trying to do mass selling and then trying time a market low to re-enter as one may miss out on the recovery surge. Anyone who tells you that they can accurately predict high point to sell and low point to re-enter the market from their crystal ball is just nonsense.

My own personal thoughts are that the end game is near. Without US and NATO support, Ukraine is doomed from the start against a more advanced and bigger armed forces of Russia. It also does not help that by end of Day 1 of the invasion, Russia has won air supremacy over the whole of Ukraine. 

I do not think that this will be a long drawn out war that will affect oil and gas supplies for too long.  While Ukraine history with Russia is complicated and both of its people are vastly different, there are many with families with ties in both countries. Hence I do not think Putin is out to totally destroy the people of Ukraine. Rather, Russia is trying to control the government of Ukraine to turn it into a puppet state in order to secure its own dominance in Eastern Europe.

3. Investment opportunities and my watchlist

There are many good bargains from the recent decline in stock prices on SGX. USA stock market still appear very high to me. China stock market is worrying due to the near collapse of their property sector which made up a huge proportion of GDP. As alluded to point 2 above, I do not think the current fear of sanctions and oil supplies disruption will spill over excessively on a long term basis to cause irreparable damages to global economies.

OCBC is interesting. Despite missing their Q4 2021 results against expectations of market analysts, it is still at an overall improvement of 35% net profit for FY2021 relative to FY2020. What's more, the reason for missing target is due more to conservative allowances being made. Personally, I felt that the market seems to have overreacted with a 5.8% drop in OCBC from S$13.16 to S$12.40 on 23 February 2022. Then as at 25 Feburary 2022, it further slumped to S$11.85 per share following Russia's invasion of Ukraine. I have started accumulating additional OCBC shares during this period. 

Another fascinating one would be United Hamsphire US REIT. It has consistently performed well with an extremely attractive distribution yield of 10.0%. United Hamsphire has delivered resilient results throughout this COVID crisis. However, its unit price is currently at a miserable US$0.610 as at 25 February 2022. 

Parting thoughts:

For every crisis, there will also be an opportunity. 2022 seems to have kicked off with a big bang.  I look forward to deploying my upcoming dividends receipt of S$12K in March 2022 back into the market. 

Last but not least, I wish everyone good health and all the best to you folks in your 2022 investment!