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Investors Swap Equities For REITs In November on Inflation, New Covid-19 Variant Concerns

Investors sought to diversify during uncertain times. Of the developed REIT markets, Hong Kong is the best-performing in the region.

By Patrick Ma, Director, Listed Products and Research

December 3, 2021 – Concerns about inflation and whether central bankers would start to reverse the ultra-loose monetary policies continued to drive market sentiment and volatility in November. During the last week of the month, news about the emergence of a new Covid-19 variant – Omicron – also caused worries about the pandemic’s resurgence and its potential impact especially on plans to reopen economies. 

Both concerns pushed global equities down 2.2% for the month. However, global REITs outperformed, falling only 1.3%, as investors sought defensive plays.

Asia Pacific equities fell 3.7% in November due to further concerns about the slowing China economy and the financial health of Chinese property developers,. 

Following the global trend, Asia Pacific REITs also outperformed the region’s equities, dropping only 3% during the month. 

Most REIT markets in the region performed better than their equity counterparts, except for Japan. Japan’s retail and hotel REITs have been under selling pressure amid the new Omicron variant. 

Meanwhile, Hong Kong REITs were among the best performing REITs in the region, as investors were positive about Link REIT’s earnings. Its results in the first half of the year indicated a stabilised Hong Kong retail sector. Its continued acquisitions in Hong Kong, China and Australia were also positive for the REIT. 

In Australia, Goodman Group was the best performing REIT with a 12% increase. Its management upgraded Goodman Group’s forecasted earnings per share (EPS) growth for next year from 10% to 15%.

Looking forward, the Fed’s intention to end the asset purchase programme earlier than planned and the spread of the new Omicron variant will be closely watched.

US Fed Chairman Jerome Powell had said that current inflationary pressure was more than  “transitionary.” This raised market expectations that the US could raise interest rate as early as May 2022. 

Meanwhile, the emergence of the new Omicron variant has already put a brake on most countries’ plans to reopen economies. Israel and Japan have already implemented travel bans on all foreigners going into each country. 

Any escalation of counter measures against this new Covid variant will adversely affect the travel and hospitality sectors, as well as the retail sector. 

Under such a backdrop, we believe that capital markets will become more risk averse and will turn more positive towards defensive plays such as REITs. This will likely offset any negative implications from a potential interest rate increase.