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Japan REITs Were Worst Performing in Asia Pacific in February

By Patrick Ma, Director of Products, Admiral Investments

In February, the market continued to speculate about the potential for a lower US interest rate. The US’s CPI grew 3.1% year-on-year in January, which was above market expectations. This led the market to look towards fewer rate cuts starting in mid- or late 2024. The US Fed officials’ reiteration of caution over rate cuts also dimmed expectations of an early and aggressive rate cut cycle. Thus, the US 10-year Treasury yield breached the 4.3% level and the USD strengthened during the month.

Despite higher rates and a stronger USD, the US stock market’s focus had been on corporate earnings, especially those of the “Magnificent 7” tech giants, and Nvidia in particular. The better-than-expected 4Q 2023 earnings and the positive growth outlook of Nvidia further fuelled gains in generative AI-related plays and other stocks. 

Meanwhile, Japan’s Nikkei Index reached its highest level since the 1990s on the back of a weak yen that helped exporters’ performance and expectations of the end of zero interest rate policy. China cut its 5-year loan prime rate by an unexpected and unprecedented 25 bps, which signalled more aggressive policy moves to support the economy and the real estate sector. Global equities rose 4.3% whilst Asia Pacific equities rose 4.0% in February. 

Despite strong equity market performances across the world, those for global REITs stayed weak with a 0.6% drop for the month and that for Asia Pacific REITs was down 2.9%, due to a slower-than-expected interest rate cut outlook. Japan REITs were the worst performing in the Asia Pacific, down 7.1% decline, following a worse-than-expected 4Q 2023 real GDP growth of -0.4% and the weak yen. The exceptions were hotel REITs (Hoshino Resorts REIT +6.8%, Invincible Investment +1.3%), as the weak yen led to an increase in tourist numbers. Australian REITs fell 1.4% but they were the best performing in the region. The sector outperformed Australian equities. The best performing Australian and Asia Pacific REIT was Goodman Group, which rose 16.8% during the month, after the company reported better than expected for the 6-month ended December 2023 and announced its expansion into the data centre segment. 

While the latest US PCE inflation numbers met market expectations, reaffirming the case for a US interest rate cut later this year, it’s increasingly likely that the Fed will adopt a slow and cautious stance on the pace of policy rate reduction. With US interest rates persisting at relatively high levels and leading the interest rate cycle in the Asia Pacific region, and with the region’s economies showing signs of slowdown, Asia Pacific REITs may continue to face pressure in the near term. However, the prospect of further fiscal and monetary stimulus from China, following the commencement of the two meetings of the Chinese People’s Congress and the Chinese People’s Political Consultative Conference, should support China’s economic growth and drive growth in the region. Eventually, monetary loosening by central banks in the Asia Pacific region should also bolster the region and its REITs.