Weekly Commentary: 18 October 2021 – 24 October 2021
As can be seen below, positive gains from all of the major indices for two consecutive weeks. Growth as loosely represented by the NASDAQ Composite Index led the big three with 2.18%, while the S&P 500 and the DJIA had a 1.84% and 1.58% increase each. All sectors in the S&P 500 also delivered positive returns with the top performers for the week being Consumer Discretionary (+4.05%), Materials (+3.63%), and Real Estate (+3.35%). The lagging sectors, on the other hand, were Communication Services (+1.04%), Consumer Staples (+1.21%), and Energy (+1.54%). Meanwhile, both the STI and the Hang Seng had a 2% weekly gain.
The drop in longer-term yield seemed to be the major contributor to growth and Real Estate stocks outperformance. The yield curve flattened after four consecutive weeks of steepening as the 10Y-2Y yield spread fell sharply by 11 bp to reach 1.18%. The U.S. 2-year Treasury yield increased by 9 bp to 0.41% while the 10-year fell by 2 bp to reach 1.59% by Friday. Inflation is worrying and lying on a level not seen since the global financial crisis in 2008. The Consumer Price Index published monthly by the U.S. Bureau of Labor Statistics (BLS) indicated that the inflation rate by the end of September was back at 5.4% after dropping slightly to 5.3% in August. Furthermore, the Fed’s officials seemed to be divided on hiking the interest rate and the view of transitory inflation from its September meeting minutes.
Global REIT markets reported positive gains all around. The 12-month yield spreads are generally positive overall as well and favourable towards REIT’s forward total return. Back at home, positive returns from all S-REITs sectors with Retail (+2.32%) and Diversified (+2.20%) being the best while Healthcare (+0.84%) and Office (+0.93%) did not perform as well as the rest. The 7-day moving average of total COVID-19 cases rose slightly to 3045 from 3003 of the previous week, reaching three times the peak last year. Although virus development and the pace of recovery going forward will dictate the rebound, S-REITs in the Hospitality, Office, and Retail segment might be a great investment opportunity for investors today. Most are undervalued In terms of Price-to-BV and Price-to-NAV due to the current uncertainty in the market and the long-term outlook remained positive as the Singapore Government has also reiterated its plan to stay connected to the world with effective safeguards and border restrictions going forward. This includes the vaccinated travel lanes (VTLs) that are to be extended to nine additional countries from Oct 19 – Canada, Denmark, France, Italy, the Netherlands, Spain, Britain and the United States.
Globally, REIT is the best inflation-adjusted asset class for the past 20 years (6.4% total return CAGR vs stocks’ 5.5%). US-REIT dividend growth has outpaced the annual inflation rate as measured by the Consumer Price Index except in 2002 and 2009 (shortly after the GFC). The iEdge S-REIT Index has returned 6.06% annualised for the past ten years in contrast to Singapore’s average core inflation rate of 1.32%, outperforming the STI’s 3.06%.
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