Record-Low Interest Rates To Persist
In comparison to the SARS epidemic in 2003, China makes up a larger part of the global economy now. With millions of mainland Chinese workers under weeks of travel 'lock-down', lots of business activities and industrial production have ground to almost a halt. China's economy was already weakened by a year-long trade war against the US prior to the coronavirus outbreak. The ripple effects of a sharp economic slowdown in China would be felt by the rest of the world in 1H2020. The Chinese central bank is expected to do 'whatever it takes/costs' to prop up the economy in 2H2020 by cutting interest rates and pumping liquidity into the system. Other major central banks in Europe and Japan are also expected to keep their rates near rock-bottom. Germany and Japan even have negative-yielding bonds. Under such a scenario, the US Fed is unlikely to hike rates in 2020. I believe further negotiations for a Phase 2 trade deal between the US and China would be delayed. Donald Trump probably needs to focus on his re-election campaign and Xi Jinping has to contain the virus outbreak. China has requested flexibility in meeting the Phase 1 trade deal targets.
Short-Term Pain From Coronavirus Outbreak
Businesses that rely heavily on human traffic would be affected the most by the worsening virus outbreak, namely the hospitality, tourism, retail and aviation sectors. Risk level in Singapore has been raised to DORSCON Orange as local human-to-human transmission was confirmed. I believe blue-chip retail REITs such as CMT, MCT and FCT are able to ride out the storm, especially FCT, which owns suburban malls within huge residential catchment areas.
Sure, the short-term pain is going to be sharp and deep, but the recovery - when it comes - should be fast. So far, the logistics and data centre sectors seemed more resilient as their business models depend on the flow of goods and data, not humans. Furthermore, there is long-term structural growth in both sectors. E-commerce could arguably perform better during this period as more people prefer to stay indoors and shop online. Global cloud service providers like Amazon, Microsoft, Google and VMware are not just going to stop their operations. It's probably business as usual for them.
Reaping What Was Sowed In 2019
S-REITs like CMT, MCT, FCT, AREIT, MLT, MINT and KDC had all made DPU-accretive acquisitions last year. It was a 'scaling up' party. The short-term virus fear is not going to stop me from reaping the benefits in 2020. I am expecting these REITs to post healthy DPU growth in 2020. Of course, I understand their prices could come under shorting pressure during a bear market. Well, I am prepared to benefit a little from the shortists. Since January 2019, I had signed up for SGX's securities lending programme. You see, back in 2019, I was expecting the Fed rate hikes to have a negative impact on the valuation of REITs. I thought since I am not selling my REIT holdings, I might as well loan them out to earn a little extra cash.
That scenario did not materialize as the US-China trade war forced the Fed to cut rates three times. Only my KDC units were loaned out once over a 5-day period in November 2019. Hopefully, I would enjoy better luck in 2020.
Post a Comment