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Retail and Hotel REITs recover

Admiral Investments: Equity Takes Lead As Funds Exit REITs

Admiral Investments: Equity Takes Lead As Funds Exit REITs

By Patrick Ma, Director, Listed Products and Research

Market expectations for a U.S. rate cut and an improvement in Sino-US trade relation helped fuel June’s rebound for equity markets, leading to underperformance of Asia Pacific REITs.

While we saw a sell-off in global equity markets in May on fears of escalating Sino-U.S. trade tensions, such concerns dissipated as the G20 meeting in Japan approached. At the close of the G20 meeting, China’s President Xi Jinping and U.S.’s President Donald Trump met and reached a near “truce” on trade tariff issues. The equity markets found further support after the U.S. Fed indicated that the case for “a somewhat more accommodative policy has been strengthened” and forecasted that core inflation is unlikely to reach its 2% target, raising the possibility of a rate cut in the second half of the year. The MSCI World index rose 6.6% in June.

Within the Asia Pacific region, equity indices tracked global markets for risk-on rallies. As a result, Asia Pacific REITs underperformed their respective equity indices as funds exited from defensive plays. The GPR/APREA Investable REIT Index reported a 4.7% increase in June versus the MSCI AC Asia Pacific’s 5.4% gain over the same period. However, on a year-to-date basis, selected REIT markets such as Japan and Singapore still outperformed their equity counterparts.

Improvements in geopolitical conditions, as well as expectations of rate cuts by other central banks, which are following the U.S., should add to the current positive sentiment in the equity markets. We expect further relief on the Sino-US trade issue, and this could lead to near term underperformance of Asia Pacific REITs as equity becomes the preferred asset class.