Does The REITs-Rally This Time Round Have Legs?

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I am not a financial expert, so this post is just purely my personal feeling.  Learning from AK71, I am starting to talk to myself a little bit more as well (without the part on technical and fundamental analysis).  As such this post is just based on my gut feel and not supported by any statistics or numbers.  Just having fun!

So since the speech by Jerome Powell on 10th July 2024, the Singapore REITs have registered a huge rebound in the following two days. Based on the Lion-Phillip S-REIT ETF, REITs staged a 6.35% rebound in the following 2 trading days (11th and 12th July 2024).  More encouragingly, the daily trading volume in these 2 days were around 10 times higher than the average daily trading volume in the past year!  This price movement, supported by the high volume, may be an indication that this run up for REITs still have legs!  Fast-forward to this week, the performance of the REITs are largely subdued (except for the US Commercial REITs) and the trading volume has normalized.  So can we really be hopeful for better days ahead for the REITs, or will it return to it's declining path?

*On the week that this blog is posted, the market sentiment has been weak, dragging down the share price from Banks to REITs*

Let's be logical and just take a look at history.  The last hype felt by the REITs happened in the end of 2023, or more specifically on 13th December 2023, where the last FED meeting in 2023 indicated 3 rate cuts coming in 2024.  That news boosted the REITs as well, as the Lion-Phillip S-REIT ETF jumped by 3.57% in the following 2 days.  However, that rally in December 2023 was short-lived as upon entering 2024, REITs were back in the downtrend.  I suppose the stark difference between then and now could be the trading volume.  Although the news at that time was positive for REITs but many investors were also skeptical of the news because inflation was still sticky at that time, with November CPI and core CPI numbers (released in December 2023) at 3.1% and 4% respectively.  Compare with the June CPI and core CPI numbers (released in July 2024) at 3.0% and 3.3% respectively, with a negative 0.1% month on month CPI numbers, analysts and investors are probably more confident now than in 2023, that interest rate cuts is indeed going to materialize soon.

So how near are we to rate cuts?  Based on FedWatch, markets are pricing in a 91% probability of a 25 basis point cut in September 2024.  Personally, I am cautiously optimistic.  Of course I am looking forward to rate cuts, but let's not forget both the Russia-Ukraine war and Middle-East war are still on-going, with no end in sight, though everyone far from the affected region are feeling less concerned about the wars.  As long as uncertainty remains, anything can happen.  This is especially concerning when we enter the winter months later this year, will price of crude increase again to reignite inflation?  While on the flipside, the slowdown in China is placing a cap on the oil prices as demand slows.  As such, although I would like interest rate cuts to happen, which may help to propel my portfolio, nonetheless, I am remaining conservative, and I shall expect the interest rates to remain higher for longer.  I shall expect 1 rate cut of 1 basis point in 2024, and probably 2 to 3 rate cuts of 1 basis point each in 2025 (basically by end of 2025, interest rate should hover around 4.25-4.50%).  Any lower rates without recession will be a big bonus.  

On a personal biased note, I am hoping steep rate cuts to only materialize in second half of 2026 (because I am going to refinance my mortgage loan soon with a 2-year fixed rate package this year, and I can refinance again only in 2026) and not any earlier, but I am no fortune teller so I can just hope, and realistically go with the flow.  At the meantime, I will just enjoy the ride while REITs still have legs, and enjoy the euphoria as my portfolio value breaks new highs.  I believe we have confidently rebounded away from the lows reached in October 2023 and April 2024, and probably not retesting the lows anytime soon in the near future.  But at the same time, I will not be adding on to my REITs portfolio as it is already a large percentage of my equities portfolio.  Instead, I will just happily collect the dividends in upcoming quarters.  Barista FIRE, here I come...!

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