Bonds Investing REITs

The Everything Sell-Off: Time to Buy S-REITs and Bonds?

Calvin Lo

Since hitting its 52-week high of 4,607 on 31 July 2023, the S&P 500 has fallen around 8% to 4,224 (as of time of writing). Besides US equities, it feels like every other asset class is declining as well maybe except for oil and gold.

YTD performance

S-REITs (represented by SGX:SRT) are among the worst-hit asset classes, down almost -13.6% YTD, followed by bonds (represented by AGG) down -5.5% YTD and Singapore’s benchmark STI (represented by SGX:ES3) down 4.4% YTD.

Although fallen pretty far off their lows, equities are still up YTD. Global equities (represented by VT) are up 5.3, US stocks (represented by VOO) are up 11.5% YTD, and US tech (represented by QQQ) are up 35.2% YTD.

Over the past 3 months though, almost all asset classes posted negative returns except for gold (represented by GLD). GLD is actually up 8.2% YTD.

Macro is deteriorating

The latest inflation data came in slightly above expectations. Oil prices are rising due to OPEC production cut, strong demand for energy, and probably also partly due to the Israel-Hamas conflict. Similarly, gold prices are up on rising uncertainty.

As expected, the Fed is striking a hawkish tone. With inflation expected to stay high, I expect the Fed will continue to keep rate hikes on the table. IMO, rate cuts should be moved further out maybe till 2025 at least.

US treasury bond yields have already moved up, even ahead of any Fed decision, with the 10-year Treasury crossing the 5% yield.

Similarly, Singapore 10-year SGS bonds yields have been steadily rising and are currently yielding 3.424% as at time of writing.

Why I find S-REITs and bonds attractive

Bond prices move inversely to bond yields, so as yields increase, bonds become more attractively priced. The question of course is how much further could bond yields rise? Not an easy question to answer, maybe I would go so far as to say close to impossible.

Inflation was not as transitory as many thought (even the Fed), and might even be creeping up. The Fed will probably want to nip any rebound in inflation in the bud by raising rates again. However, there are already worries about how the combination of higher inflation and higher interest rates is affecting the consumer sentiment and spending power.

If the strength in the labor market and consumer spending drops off, inflation could reverse back downwards, taking the pressure off the Fed to keep rates high. In this scenario (which seems unlikely in the short term), bonds might start to perform well again. REITs would also benefit if rates start to stabilise again and especially if rates are cut.

REITs and in particular S-REITs which have been hit particularly hard in recent times. REITs are sensitive to interest rates because they rely heavily on loans to fund their properties. When interest costs on those loans increase, income and profits at REITs come under pressure.

S-REITs are now yielding around 6.15% (according to the iEdge S-REIT Leaders Index as of end Sep 2023, factsheet here), which is a pretty attractive long-term yield. S-REITs are also trading at close to 10 year lows based on that index.

You can invest in an index tracking S-REITs like Syfe REIT+ or CSOP iEdge S-REIT Leaders Index ETF.

Singapore government bonds (considered risk-free) are also pretty attractive, with the SSB offering a 10-year average yield of 3.32% and the latest 6-month T-bill (auctioned 12 Oct 2023) cut-off yield at 3.87%. Long-dated US Treasuries (represented by TLT) are also yielding 3.87%.

In contrast, the earnings yields (inverse of P/E) of the S&P 500 equities is at 4.29%, which is not particularly high looking at the past 20 years. The gap between earnings yield of equities vs government bonds is a relatively small 0.5% thereabouts despite the much higher risks and volatility that comes with investing in equities.

My thoughts and what I’m doing

Market sentiment has fallen off a cliff. The CNN Fear & Greed index is reading 26-Fear, close to Extreme Fear. Typically, I like to invest during times of fear and heightened uncertainty.

Personally, I think S-REITs and bonds offer an attractive risk-reward opportunity, so I would be looking to deploy some cash in lump sum soon. As for equities, I think there’s more room to fall, so I would just continue to DCA.

Since I think inflation should stay under control and bond yields may not rise much further, I will likely reduce my holdings of government bonds (SSB) and cash funds in order to lock-in attractive prices for the long-term.

Do you think it’s a good time to buy S-REITs and/or bonds?

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Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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2 thoughts on “The Everything Sell-Off: Time to Buy S-REITs and Bonds?”

  1. S-Reits share valuation also depend on risk-free interest rate.
    If interest rate go up, then share value need to go down so that the S-Reit dividend yield is attractive enough compared to the interest rate.
    E.g. if you can get 4% on T-bill, then the S-Reit share price need to go down enough so that yield at least 6% or more. Otherwise, no one will buy S-Reit; can just get T-bill instead.

  2. Pingback: REIT Posts of the Week @ 28 October 2023

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