By Patrick Ma, Director of Listed Products, Admiral Investments
Oct 5, 2023 – Asia Pacific’s top 100 most traded REITs dropped 5.3% in September, underperforming the region’s equities but outperforming global REITs, as inflationary pressure raised the prospects of more interest rate increases.
Although the US Fed Fund rate had risen more than 500 basis points since the beginning of the current rising interest rate cycle in 2022, the US economy remained resilient and inflationary pressure persisted. Adding to inflation concerns were production cuts by OPEC and Russia, which led to a rally in oil prices.
The US 10-year Treasury bond yield climbed to 4.57%, the highest since October 2007. The USD strengthened, reaching a recent high and appreciating against most currencies.
Although the US kept the Fed Fund rate unchanged in September, it indicated a possible rate hike in November and the need to keep the policy rate at a higher level well into 2024. The “higher-for-longer” rhetoric pressured capital markets, leading to a 4.4% drop in global equities.
Global REITs did not fare well under the double whammy of rising interest rates and expectations of recessionary pressure and economic slowdown, which saw share prices falling 6.5% and underperforming global equities
Asia Pacific equities were also weak after the Chinese government further relaxed policies on property markets with lower mortgage rates and down-payment requirements, as markets worry about the region’s growth outlook, pressure from higher US interest rates, and a stronger USD. Asia Pacific equities dropped 2.3% but outperformed global equities.
Australian REITs were the worst hit among Asia Pacific REITs during the month due to concerns about the domestic economy, export performance, and a weak AUD.
In the near term, market expectations of a “higher-for-longer” interest rate environment and possible weakening of the US economic growth outlook for 2024 will likely lead to further weakness in capital markets. Global REITs are likely to be under pressure along with the equity markets. Despite the general weakness, we still see pockets of outperformance among the Asia Pacific REITs in segments such as hospitality, industrial and data centre