Bulls And Bears

Banks, Reits under watch as Fed hike looms

Market watchers noted that investors are looking at more than the rate hike announcement - what United States Federal Reserve chairman Janet Yellen will say on the economy is seen as more important.
Market watchers noted that investors are looking at more than the rate hike announcement - what United States Federal Reserve chairman Janet Yellen will say on the economy is seen as more important.PHOTO: REUTERS

Shares of three local banks rise ahead of US announcement in an otherwise tepid session

Asian markets put in a mixed showing yesterday as investors counted down to what many regard as a likely interest rate hike by the United States Federal Reserve.

Singapore's benchmark Straits Times Index (STI) closed just 1.17 points or 0.04 per cent lower at 2,954.06. Total market volume also cooled further, with only 1.15 billion shares worth $884.1 million traded.

Other markets ending in the red included Shanghai, down 0.46 per cent, and Kuala Lumpur, off 0.12 per cent. Tokyo managed to eke out a 0.02 per cent gain and Hong Kong edged up 0.04 per cent.

Market watchers noted that investors are looking at more than the rate hike announcement. What Fed chairman Janet Yellen will say on the economy is seen as more important.

"The consensus shows two rate hikes in 2017 and three in 2018, and ultimately it will depend on the US economy and global markets. In the event the (Fed) statement is more hawkish than expected, the dollar will likely get a boost," CMC Markets analyst Margaret Yang said.

A stronger greenback may have several implications, such as weaker commodity prices and capital outflow from Asian bourses.

"However, based on past experience, Dr Yellen might maintain a cautious view, until solid economic data provides more evidence to support future rate hikes," she added.

Rising interest rates are also seen as a long-term boon for banks - set to enjoy better margins. Sure enough, shares of all three local banks rose yesterday, among the nine STI stocks that ended higher in an otherwise tepid session. DBS Group Holdings added 16 cents or 0.9 per cent to $17.96, OCBC put on five cents or 0.54 per cent to $9.24, and United Overseas Bank closed four cents or 0.19 per cent higher at $21.20.

The trio were also in the spotlight as Moody's downgraded their baseline credit assessments from Aa3 to A1 to reflect uncertainties around asset quality and profitability.

"The ongoing credit challenges that these banks face at home and broadly in Asia... have translated into higher problem assets this year, and Moody's expects further negative pressure on asset quality in 2017 to create downward pressure on profitability due to higher credit provisions."

But Moody's stressed that the trio maintain robust credit metrics.

Ascendas Real Estate Investment Trust closed seven cents or 2.93 per cent lower at $2.32. CapitaLand Mall Trust dropped 1.5 cents or 0.77 per cent to $1.93, and CapitaLand Commercial Trust eased two cents or 1.3 per cent to $1.52. The impact of rising interest rates may affect the Reit sector also. It typically relies on debt to finance asset acquisitions, and may be vulnerable to a heavier financial burden.

Still, Singapore-listed Reits have been relatively strong performers this year. The SGX S-Reit Index posted a year-to-date total return of 11.6 per cent, the bourse said, much higher than the STI's 6.3 per cent.

A version of this article appeared in the print edition of The Straits Times on December 15, 2016, with the headline 'Banks, Reits under watch as Fed hike looms'. Print Edition | Subscribe