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Strategy Flash Note - Low interest rates become a thing of the past

Written By Stock Fanatic on Wednesday, June 5, 2013 | 5.6.13

Global equity and bond markets appeared to have abruptly entered the twilight zone in the past two weeks. From a balmy scenario of low interest rates and mild growth, the investment climate has suddenly turned into a stormy one with the risks of rising interest rates and bubbly bond valuations.

Should interest rates rise, winners in Singapore would be banks and companies with cash piles. Losers would be companies with high net gearing and REITs. The fact that REITs have already reacted to rising bond yields does not mean that they will automatically recover to pre-selldown highs. We maintain our 3,460 FSSTI target (bottom-up) and Underweight rating given FSSTI’s lack of EPS growth.

What Happened
10-year bond yields have risen by 40-50bp in the past month. The casualties of the higher bond yields have been REITs and telco stocks. Recently, bond yields seem to have stabilised and stopped rising. In response, the share prices of REITs rebounded on Tuesday.
What We Think
In our end-12 Singapore outlook, we took the view that the market did not expect interest rates to rise as yet but the risk remained. If interest rates were to rise, the REIT sector would be most at risk because of its high ownership. 


We have been underweight on REIT and telco since end-12 but upgraded them to Neutral in May when Japan started QE. Our recent strategy aims to find value in banks (DBS), NAV plays (UOL, CAPL, GLP), consumer companies (THBEV, SATS) and stable business models (STE, EZI, VARD) with yields, rather than pure REITs.

What You Should Do
The common question posed is whether investors should get back into some of the REITs. We reiterate our preference for banks, consumer names and high-yielding, net cash operating companies over REITs and highly-geared companies. The latter sees a higher concentration among commodity, shipping and second-tier offshore and marine companies. Our top stock picks are unchanged. (Read Report)

Read Related Report
Singapore Strategy - Gravity Check
Monday, 3 June 2013
- Maybank Kim Eng Research

Read Other Reports by CIMB
WEEKLY REALTY CHECK - Wrap on ASEAN and China
Monday, 3 June 2013
- CIMB Research

Source : CIMB Research


Posted on Wednesday, June 5, 2013 | 5.6.13


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