SINGAPORE: In a move that could shake up global markets, investors are advised to shift their focus towards real estate investment trusts (REITs) and other promising sectors in the Singapore stock market, as the Federal Reserve is expected to cut interest rates for the first time in four years.
The roller coaster ride of global markets, triggered by the US central bank’s rate hikes beginning in March 2022, may soon come to an end.
With the Fed’s September 17-18 meeting on the horizon, analysts predict a rally in risk assets, particularly stocks, as the era of high Fed rates, currently at 5.25% to 5.5%, draws to a close.
Singapore stock market
According to CGS International, as reported by the Straits Times, the Singapore stock market has historically benefited from the initial stages of interest rate easing, as seen during the 2007 and 2019 rate cuts.
The brokerage suggests that investors should increase their exposure to S-Reits, which are likely to gain from widening yield spreads compared to the 10-year government bond yield.
As funding costs decrease, this could lead to potential earnings growth and new investment opportunities.
While many market strategists anticipate another Fed rate cut in December, the size of future cuts will depend on the US economy’s trajectory, which is currently leaning towards a “soft landing” rather than a recession.
Despite the latest US consumer price data indicating that inflation is near its lowest levels since late 2022, there is a prevailing belief that the Fed will not rush into aggressive rate cuts, mindful of the risk of a 1970s-style inflation resurgence.
The CME’s FedWatch Tool shows that traders are betting on a 69% chance of a 25-basis-point rate cut at this week’s meeting. OCBC Investment Research expects a 25-basis-point cut on September 18, with discussions—but not a decision—about larger cuts to maintain policy flexibility.
Rate cuts – positive sign in controlling inflation
Thilan Wickramasinghe, head of research at Maybank Securities, believes that the market will see a rate cut as a sign of the Fed’s confidence in controlling inflation.
A surprise 50-basis-point cut could significantly boost sentiment, especially for rate-sensitive sectors like REITs, telcos, and industrials.
Analysts also highlight that the Singapore market is currently trading at an attractive 12.7 times price-to-earnings ratio, with a 4.7% dividend yield, making it one of the highest in the region.
The market is considered undervalued and underappreciated, with many stocks trading below their net asset values.
Favored stock picks include CapitaLand Ascendas Reit, ComfortDelGro, ST Engineering, and Singtel, among others.
Global funds have been flowing into Southeast Asian markets in anticipation of a Fed rate cut, with significant inflows into Singapore stocks since the Straits Times Index surpassed the 3,400-point level on August 29.
However, analysts caution that while stocks may rally on a Fed rate cut, market volatility could persist due to uncertainties such as the US presidential election, geopolitical tensions, and global supply chain constraints.
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