Weekly Commentary: 09 May 2022 – 15 May 2022
The stock market continued to decline for five consecutive weeks. Growth stocks as loosely represented by the NASDAQ Composite (-1.50%) fared worst, followed by the Dow Jones Industrial Average (-0.21%) and the S&P 500 (-0.18%) respectively. Closer to home, both the STI (-1.44%) and the Hang Seng index (-5.16%) ended the week in the negative territory as well. We saw mixed returns from the S&P 500 sectors with the top performers being Energy (+6.51%), Financials (+2.85%), and Utilities (+1.83%). The bottom three sectors in the other hand, were Consumer Discretionary (-4.67%), InfoTech (-2.12%), and Communication Services (-1.33%).
On Wednesday, the U.S. Federal Reserve raised its benchmark short-term interest rate by 0.50%, the largest since 2000, while also signaling that more half-point increases are on the table for all remaining meetings this year. Initially, the market reacted positively after the comments that the Fed was not considering raising interest rates by 0.75%, but quickly retreated the next day as worries loomed on the impact to the economy. As a result, Tech stocks were particularly hard-hit as investors pulled back further on their estimates and valuations. Meanwhile, there were no positive developments in the Ukraine-Russia conflict.
The Consumer Price Index published monthly by the U.S. Bureau of Labor Statistics (BLS) had indicated that the U.S. inflation rate by the end of March had increased by 1.2% MoM to reach 8.5%. This is more than four times above the Fed’s 2% target and the highest we have seen since 1982’s 8.4%. The rate is expected to climb due to the high energy prices. Strong consumer demand, shortages of supplies such as semiconductors, and supply-chain constraints caused by the sporadic pandemic outbreaks had also elevated inflation for the past year. The high inflation has been the main driver for an increase in interest rate, which was suppressed to stimulate economic growth during the pandemic. However, hawkish rate hikes usually slowed economic growth and present the possibility of a recession if the rate is increased too far.
The yield-curve steepened last week as the 10Y-2Y US Treasury yield increased by 18 bps to 0.40%. The U.S. 2-year Treasury yields had increased slightly by 2 bps to reach 2.73% while the 10-year also increased by 20 bps to 3.13% (the first time since 2018). The overall stock market sentiment remained in risk-off mode and volatile as the global High Yield (HY) – Investment Grade (IG) spread continued to widen by 24 bps to 2.68% while the CBOE Volatility Index (VIX) fell by 321 bps to 30.19%. Both are well over their 20-day exponential moving averages of 2.34% and 26.00% respectively.
As can be seen below, weekly performance from the global REIT markets were mostly mixed. However, the overall 12-month yield spreads are also mostly positive and favorable towards REIT’s forward total return. Back at home, the iEdge S-REIT Index (-1.85%) and all of the S-REIT sectors reported negative returns, with the exception of Hospitality (+0.80%). Healthcare (-0.34%) also relatively fared better. The bottom two S-REIT sectors in the other hand, were Industrial (-2.32%) and Office (-2.08%). With regards to the pandemic, the 7-day moving average of total COVID-19 cases gained a slight uptick to 2.7 thousand cases from 2.4 thousand the previous week. The number is still high and will likely remain this way as most of the COVID measures had been removed two weeks ago.
The Phillip SGX APAC Dividend Leaders REIT ETF (-4.72%), Lion-Phillip S-REIT ETF (-2.27%), Phillip Singapore Real Estate Income Fund (-1.17%), and Phillip SING Income ETF (-0.66%) are definitely attractive amidst current inflation and interest rate worries in the market. This is because the underlying real estate values and rentals will increase along with rising prices and outweigh the negative impact caused by rising interest rates. Globally, REIT is also the best inflation-adjusted asset classes for the past 20 years. US-REIT dividend growth have outpaced annual inflation rate as measured by the Consumer Price Index except in 2002 and 2009 (shortly after the GFC). In Singapore, the iEdge S-REIT Index has returned 5.86% annualized for the past ten years in contrast to the average core inflation rate of 1.37%, outperforming the STI’s 3.79%. The Lion-Phillip S-REIT ETF has also returned 4.49% annualized (5.09% before fund expenses) since its inception in October of 2017, outpacing the average inflation rate of 0.59% and the STI’s 3.28% for the same time period. Furthermore, our S-REIT ETF and Unit Trust are the best way to get coverage for S-REITs as individual REITs may have more rights issues that are costlier than the dividends that they pay.
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