REITs – Singapore - UOB Kay Hian 2019-06-10: Potential Cut In Interest Rates If Trade Conflict Escalates

REITs – Singapore - UOB Kay Hian Research | SGinvestors.io ASCOTT RESIDENCE TRUST (SGX:A68U) CDL HOSPITALITY TRUSTS (SGX:J85) FRASERS CENTREPOINT TRUST (SGX:J69U) PARKWAYLIFE REIT (SGX:C2PU) CAPITALAND COMMERCIAL TRUST (SGX:C61U)

REITs – Singapore - Potential Cut In Interest Rates If Trade Conflict Escalates

  • The FED will closely monitor the implications of trade negotiations and will act appropriately to sustain economic expansion. Yield for 10Y government bonds receded by 56bp to 2.12% in the US but remained unchanged at 2.04% in Singapore during 1H19.
  • Our sensitivity analysis indicates that target prices of S-REITs will rise 5.1% for a 25bp drop in RFR.
  • Maintain OVERWEIGHT.



WHAT’S NEW


Jerome Powell: The Fed will respond appropriately.

  • Fed Chairman Jerome Powell made opening remarks at the Conference on Monetary Policy Strategy, Tools and Communications Practices on 4 Jun 19. He devoted one paragraph of his 10-page speech to trade negotiation. He said the Fed does not know how or when the trade negotiations will be resolved. However, the Fed is closely monitoring the implications and will act appropriately to sustain the economic expansion.
  • The futures market has signalled a probability of 20% for a rate cut at the FOMC meeting on 18-19 June. The probability for at least one rate cut by the FOMC meeting on 30-31 July has increased to 70%.

The bond market signals a slowdown.

  • In the US, the yield curve has shifted parallel lower during 1H19, reflecting expectations of slower economic growth and lower inflation over the longer term. The inversion at the short-end of the yield curve has worsened during 1H19. However, the 2Y-1Y yield spread recovered slightly from -28bp to -16bp last week.
  • In Singapore, long-term interest rates, including the 10Y government bond yield (2.04%), remain relatively unchanged. The inversion at the short-end of the yield curve has worsened. Yield for 2Y government bonds has dropped 19bp to 1.73% so far in 2Q19. The 2Y-1Y yield spread worsened from -15bp to -33bp last week.

Dark clouds hang over G-20 Summit.

  • There are the following obstacles:
    1. President Donald Trump said in his State of the Union address in early February that the trade deal with China must include real structural changes to end unfair trade practices, so as to reduce chronic trade deficit and protect American jobs. Such structural changes include ending of subsidies for state-owned enterprises, which would be difficult for the Chinese to stomach. Another thorny issue is enforcement and verification.
    2. President Trump said he will make the decision on whether to impose tariffs on the remaining US$325b of imports from China after meeting President Xi Jinping at the G-20 Summit, which will be held on 28-29 Jun 19 in Osaka, Japan. If implemented, essentially all imports from China into the US would be subject to a 25% tariff.
    3. Former Secretary of State Rex Tillerson has warned that China may give up on trade talks with the US.


ACTION


Maintain OVERWEIGHT.


Sensitivity analysis.

  • Our sensitivity analysis indicates our target prices for S-REITs would increase by 5.1% for a 25bp drop in risk-free rate (RFR).

SENSITIVITY ANALYSIS – TARGET PRICES VS RFR



-50 bp -25 bp 0 bp 25 bp 50 bp
Healthcare
PARKWAYLIFE REIT (SGX:C2PU) $3.69 $3.45 $3.25 $3.05 $2.88
Hospitality
ASCOTT RESIDENCE TRUST (SGX:A68U) $1.63 $1.54 $1.46 $1.39 $1.33
CDL HOSPITALITY TRUSTS (SGX:J85) $2.22 $2.10 $1.99 $1.89 $1.80
Industrial
ASCENDAS REIT (SGX:A17U) $3.25 $3.13 $3.01 $2.90 $2.80
MAPLETREE LOGISTICS TRUST (SGX:M44U) $1.50 $1.44 $1.39 $1.34 $1.29
Office
CAPITALAND COMMERCIAL TRUST (SGX:C61U) $2.45 $2.30 $2.16 $2.04 $1.93
KEPPEL REIT (SGX:K71U) $1.53 $1.43 $1.37 $1.27 $1.20
SUNTEC REIT (SGX:T82U) $2.23 $2.10 $1.99 $1.89 $1.80
Retail
FRASERS CENTREPOINT TRUST (SGX:J69U) $2.99 $2.84 $2.71 $2.58 $2.47
CAPITALAND MALL TRUST (SGX:C38U) $2.94 $2.79 $2.65 $2.52 $2.41


SECTOR CATALYSTS

  • Interest rates are expected to drift sideways in the foreseeable future.
  • Limited new supply for office, hotel and logistics segments in 2019 and 2020.


ASSUMPTION CHANGES

  • We keep our earnings forecast unchanged.


RISKS

  • Uncertainties from US-China trade conflict.





Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-06-10
SGX Stock Analyst Report BUY MAINTAIN BUY 1.460 SAME 1.460
BUY MAINTAIN BUY 1.990 SAME 1.990
BUY MAINTAIN BUY 2.710 SAME 2.710
BUY MAINTAIN BUY 3.250 SAME 3.250
BUY MAINTAIN BUY 2.160 SAME 2.160



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