Are S-REITs The Bright Spot on the STI?

by: Tam Ging Wien


All examples and stocks quoted here in this article and on the ProButterfly.com and REITScreener.com site are for learning purposes; it does NOT constitute financial advice or a Buy/Sell recommendation. Contents are reflective of personal views and readers are responsible for their own investments and are advised to perform their own independent due diligence and take into account their own financial situation. If in any doubt about the investment action you should take, you should consult a professional certified financial adviser. 


The Singapore FTSE Straits Times Index (STI) made a low of 2,233.48 on 23-Mar-2020 and has now recovered to close at 2,499.83 on 22-May-2020 a gain of 11.9%. It is still quite a distance from its value of 3,213.71 on 19-Feb-2020 the day before the 2020 global market sell-off.

For the STI to recover its 19-Feb value, it would need to rise another 28.6%. Despite that, the STI value on 19-Feb is below its 52-week high of 3,363.71 achieved on 22-Jul-2019, almost 34.6% below.

Looking at the performance of the STI since 2016, we can see STI is right about the range of the 2016 lows. Investors putting their money into the STI during the 2016 lows would have gotten almost all their gains wiped out in this current stock market rout.


Source:
 InvestingNote.com

Investors that had their funds parked in the US Dow Jones Industrial Average (DJIA) would have faired better gaining from the 16,000 range to the current 24,500 range despite riding through the 2020 global stock market sell-off.


Source: InvestingNote.com

This begs the question, of the large cap stocks listed on the Singapore stock market, are there any bright spots left? From what we can observe, we see REITs as the only bright spot on the Singapore market, do read on for our more detailed breakdown and analysis of the STI component stocks.

STI Constituents

The Straits Times Index (STI) is the most globally recognised benchmark index and market barometer for Singapore. It tracks the performance of the top-30 largest and most liquid companies listed on the Singapore Exchange. The index is derived based on the market cap weightage of its constituents. The STI is dominated by the 3 Singapore local banks of DBS, OCBC and UOB and together make up 38.3% of the STI weightage.

The other heavy weights on the STI consist of Singtel (8.2% weightage), real estate developers (8.7% weightage) such at CapitaLand, Hong Kong Land, UOL and CityDev, REITs (10.8% weightage) and industrial (14.8% weightage) heavy weights such as the Jardine companies, Singapore Technologies Engineering, Venture Corp and Yangzijiang.

Together, the top 5 sectors alone make up 80.8% and the top 5 constituents make up 53.0% of the STI weightage.


Source: FTSE Russell ResearchProButterfly ResearchREITScreener Research


Source: FTSE Russell ResearchProButterfly ResearchREITScreener Research

STI Constituents Performance

Analysing the individual performance of all the 30 STI constituents, we found that only 2 are currently up Year-to-Date (YTD):

  • Singapore Exchange – 10.9% gains
  • Mapletree Logistics Trust – 5.2% gains

Ascendas REIT came pretty close to neutral with a loss of just 1.0%. All other constituents lost more than 5.0%. This observation is perfectly understandable since the global market sell-off has wiped out much of the gains since January.

Looking at the performance since the start of 2019, the data is surprising with only 9 constituents clocking gains. Looking back further since the start of 2016, we only found 12 gainers. Interestingly, we notice that the REITs sector seems to have been performing very well since 2016.

There is no better measure of the performance of the S-REIT sector than the FTSE ST REIT Index (FSTAS8670). Looking at the performance since 2016, we observe that the S-REIT sector actually outperformed the STI throughout the same period!


Source: InvestingNote.com

Analysing STI Performance with and without the REIT Sector

Using the historical data from the STI, FSTAS8670 and Dow Jones Industrial Average Index (DJI), we plotted the performance of the 3 indexes in percentage terms since the start of 2019. The first trading day of 2019 is taken as the 100.0% mark. From the data, it is clear that the FSTAS8670 and DJI performance is similar while the STI lagged the 2 indexes.

Both indexes gained over 25% in throughout 2019 while the STI was range bound between 1% to 11%.

Source: ProButterfly ResearchREITScreener Research

Next, we isolated the 5 REITs from the index synthetically built 2 new indexes which we will term:

  • STI5 – Constituents of the STI which are REITs
  • STI25 – Constituents of the STI which are non-REITs

We maintained the same weightage as the original STI constituents while performing this synthetic derivation. We then baselined the synthetically derived indexes to 100.0% at the start of 2019.

The reason why we term this derivation as synthetic is because we made 2 fundamental assumptions in the derivation in order to simplify the effort:

  • We assumed that the constituents as of May-2020 are the same throughout since 2016
  • We assumed that the weightage of the constituents as of May-2020 are the same throughout since 2016

While the above are assumptions are reasonable, they do not exactly reproduce the STI due to the fact that the STI constituents are constantly changing and weights constantly readjusted. However, while plotting out the charts, we can see that the derived chart in percentage terms approximate the actual STI fairly closely.

Looking at the chart below, we can see that the STI5 outperformed the rest of the STI by quite a margin. At its height in early March, it had gained more than 30% and it is currently trading about 5% above its value compared to the start of 2019. This means that the STI5 both outperformed the broader STI and the FSTAS8670 index.

The STI25 meanwhile oscillated about the 100% level throughout 2019 and is currently trading 25% below the start of 2019.


Source: ProButterfly ResearchREITScreener Research

Looking back a little further to the start of 2016, we can see that the outperformance of the STI5 really began in Oct-2018 and rallied for nearly 1.5 years till Mar-2020. Despite the global stock market sell-off in 2020, the STI5 was still at its lowest 5% above water compared to the start of 2016. Again throughout 2016, the STI5 appeared to outperform the STI25.

From early-2017 to Oct-2018, the STI25 had actually outperformed the STI5 and peaking in May-2018.

Recall that during 2015 and 2016, there were a lot of uncertainties in the markets including the US Presidential elections, Brexit and the Chinese stock market turbulence.

Does the STI5 outperform the STI25 in times of uncertainty while the STI25 outperforms the STI5 during times of stability? It does seem from the observation of the data since 2016, but there is certainly insufficient data to draw a conclusion since S-REITs are still relatively young and we are not able to go back many decades to observe the trend.


Source: ProButterfly ResearchREITScreener Research

Technically Speaking

A quick look at the recent technical of both the STI and the FSTAS8670, we can clearly see that the overall STI is weaker in terms of recovery compared to the FSTAS8670. Since the fall from 19-Feb to the lows of 23-Mar, the STI has only recovered to the 38.2% Fibonacci Levels while the FSTAS8670 managed a rebound to the 50.0% Fibonacci Levels.

For a detailed explanation of the Fibonacci Levels, please to check out the technical analysis section of our previous article Why Be Believe This Current Rally is Unsustainable.

The STI is also presently trading at the near-term support level at the 2500 range. The FSTAS8670 on the other hand has been powering higher albeit at a slower pace.

Source: InvestingNote.com

Source: InvestingNote.com

Conclusion

Following on from our previous article entitled Why Be Believe This Current Rally is Unsustainable, we think that we are unlikely to see a v-shaped recovery in the STI and there is a high possibility of retesting the lows of 23-Mar-2020. Therefore, we think that it would be worthwhile to be patient just a little longer to observe how the STI performs.

If we are right about the retest of the 23-Mar lows, then the entire STI is likely to be sold-down. However, if history repeats itself, the STI5 is likely to recover faster than the STI25 in the next sell-down.

Are the S-REITs presently the bright spot in the entire STI? From the last sell-down, it does seem so with a much stronger Fibonnaci rebound compare to the broader STI and an outperformance during 2019.

However, looking further back from 2016, the S-REIT outperformance is not a guarantee as there are times of outperformance and times of underperformance. But within this short period, it does seem to indicate that the S-REIT sector tend to perform better during times of uncertainty.

If history is anything to go by, then during this present period of uncertainty, the S-REIT sector would be our preferred bets after the next major sell-down event in the Singapore stock market.

Real Estate Investment Trusts (REITs) are one of the most reliable way to invest as they generate steady and consistent tax free cash flow. REITs also open up access for investors to participate in a diverse range of real estate assets with low capital outlay. By having and applying the right investment toolkit at your disposal could potentially boost your investment performance many folds and/or help you reduce your REITs investment risk.

In the upcoming The Essential REITs Toolkit Webinar, we will be covering:

  • Part 1: Understanding REITs
  • Part 2: Financial Toolkit for REIT Investing
  • Part 3: Sector Toolkit for REIT Investing
  • Part 4: Applying Your REIT Toolkit
  • Part 5: Q&A

Some key highlights that will be covered includes:

  • Why the traditional triple-constraint filter of high yield, low price-to-book ratio (P/B ratio), and low gearing typicaly ends up filtering sub-par REITs
  • Why it is dangerous to chase high yielding REITs without looking at other factors
  • The right metric to use when screening for high quality REITs
  • Case studies of REITs which are considered high quality
  • How do you know when is the right time to buy or sell your REIT
  • Step-by-step demo of how to screen for high quality REITs on your own

To register for the The Essential REITs Toolkit Webinar, click on the banner below:

Meanwhile, do also check out the book REITs to Riches: Everything You Need to Know About Investing Profitably In REITs available at all major bookstores around Malaysia and Singapore. To purchase the eBook (PDF) copy, navigate to http://aktive.com.sg/store/reits-to-riches/.

 

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