By Patrick Ma, Director of Listed Products, Admiral Investments.
Jan 3, 2024- Capital markets continued to ride on the prospect of lower US interest rates in December. Global equity markets rose 5.4%, while Asia Pacific equities climbed 5.0%. The US Fed maintained its policy rates at 5.2%-5.25% following its December FOMC meeting but indicated at least three policy rate cuts in 2024 at increments of 25 bps each based on its “dot-plot” projection. However, the market expected more aggressive reductions in policy rates. Tame November US inflation numbers further fuelled such sentiments. The US core CPI was 4% while the core PCE inflation was 3.2%, compared with 3.4% in October and being the smallest rise since April 2021. The prospect for lower interest rates led the US 10-year Treasury yield to drop to 3.87% from 4.35% in November, while the USD Index fell to 101.33 vs 103.50 at the end of November.
The possibility of lower interest rates was positive for REITs, which outperformed equities. Global and Asia Pacific REITs jumped 10.3% and 8.5% in December, respectively. Australian REITs were the best performing in the Asia Pacific region, increasing 13.6% during the month, led by REITs with higher leverage, such as Scentre, GPT, Charter Hall Retail REIT and Charter Hall Long WALE REIT. On the other hand, Japan REITs lagged behind the rest of the region with only a 3.1% increase, as the Bank of Japan decided to maintain its zero interest rate policy, contrary to market expectations.
For 2023, REITs rose 10.3% globally and 3.0% in the Asia Pacific, underperforming equities. REITs had been laggards in the first ten months of the year due to the US Fed’s tightened monetary stance throughout the period. However, not all REITs are equal. Australian REITs led market performance in 2023 with an 11.3% increase. Goodman Group and Stockland shined, reflecting the former’s position as a global market leader in logistics and the latter’s exposure to a still-strong Australian residential property market that rose 8.1% in 2023, according to CoreLogic’s national Home Value Index. Singapore’s REITs were the region’s next best-performing, increasing 8.4%, led by industrial REITs such as Mapletree Industrial Trust, Capitaland Ascendas REIT, Digital Core REIT and Keppel DC REIT.
As we look forward, a more aggressive loosening of US monetary policy is expected by mid-2024, which should be positive for capital markets and REITs. From a global perspective, the expected US Fed rate cuts are responses to a likely US economic slowdown. The markets also expect China to pursue supportive policies towards its economy and battered real estate sector. Japanese REITs are becoming more attractive on the back of a likely end of its zero interest rate policy this year, which will lead to a return of inflation that is positive for Japanese asset prices. Domestic and overseas institutional investors have been active in Japan’s real estate market, especially in the hospitality and multifamily sectors. Traditional real estate asset types, such as offices and retail, will likely face challenges such as rising financing costs, corporates’ cost-cutting pressure, changing working conditions and consumption patterns. The “non-traditional” real estate asset types, such as industrial, logistics, residential/multifamily, self-storage and data centres, should attract more interest from institutional investors for a better risk-return profile.