Market Watch
Markets spooked by ghost of the higher-for-longer rates
Sign up now: Get ST's newsletters delivered to your inbox
All bets are on the Federal Reserve hiking rates again in the foreseeable future.
PHOTO: AFP
SINGAPORE – Wall Street confounded observers by rallying last Friday
Despite last Friday’s uptick, the fact remains that global equity markets have had one of their most turbulent weeks since the first quarter of 2023, spooked by rising US bond yields, a rampant dollar,
Then came the latest US non-farm employment data which showed that 336,000 jobs were added in August, almost double the 170,000 jobs expected by the market.
All bets are on the Federal Reserve hiking rates again in the foreseeable future.
While September is traditionally a rough month for stocks, October has not started out well. Many insiders are writing off the Friday stock bounce as a relief rally by an oversold market following a slight pullback by Treasury yields. Some attributed it to modest wage growth numbers.
Apprehension remains about the immediate direction of the financial markets as yields on 10-year Treasuries remain just a whisker away from 5 per cent on the back of a higher-for-longer hawkish Fed tone recently. Meanwhile, yields on 30-year Treasuries hit their highest level since 2007.
Wall Street equity benchmarks are almost 8 per cent down from July highs.
In spite of Friday’s 0.9 per cent rally, the Dow Jones Industrial index is still 0.3 per cent off for the week and is at its lowest levels since June. The S&P 500 put on an impressive 1.2 per cent bounce on Friday, and is 0.5 per cent up for the week. But the tech-heavy Nasdaq is up 1.6 per cent for the week as the enthusiasm (or hope) for artificial intelligence-driven plays remains strong.
The Straits Times Index ended the week down 1.3 per cent at 3,174.39
One segment of the market which was badly bashed down was S-Reits, many of which hit 52-week lows on concerns that their earnings will be hit by higher-for-longer rates.
Top-tier names like CapitaLand Ascott Trust, ESR-Logos Reit, Frasers Logistics & Commercial Trust, CapitaLand Integrated Commercial Trust (CICT) and CapitaLand Ascendas Reit have been hammered down to their lowest levels in 2023 as investors run for cover.
As much as 60 per cent of the 20 stocks that saw the most net institutional fund outflows for the first four sessions of the week represented the S-Reit sector including CapLand Ascott, Lendlease Reit, Frasers Centrepoint Trust, CapLand Ascendas, Mapletree Logistics Trust, Keppel Reit, Mapletree Industrial Trust, CICT, Mapletree Pan Asia Commercial Trust, ESR-Logos, Suntec Reit and CDL H Trust.
The sharp increase in bond yields
Investors are growing increasingly concerned about the amount of corporate debt that needs to be rolled over at higher rates as the Fed’s tightening cycle has pushed up the marginal funding costs for businesses over the past few years. If interest rates remain high, companies must devote a bigger share of their revenue to cover higher interest expenses as they refinance their debt at higher rates. This is bad for earnings.
Market experts like Mr Vasu Menon, managing director for investment strategy at OCBC Bank, also warn of the dangers of the sharp “bear re-steeping” of the inverted US yield curve which has seen the gap between the two-year and 10-year Treasury yields narrow sharply from a negative 108 basis points in July to less than 30 basis points last Friday.
“The last time this happened, in 2000 and 2007, what followed soon after was a US recession and sharp fall in equity markets,” he pointed out. “There is no surety that this rare phenomenon will produce the same results this time around, but it calls for investors to tread with caution.”
A bear steepener is the widening of the yield curve caused by long-term rates increasing at a faster rate than short-term rates. This is a relatively rare phenomenon, but is usually read as a signal that a recession could be coming. These may pose a short-term danger for risk assets, which could fall sharply as they have in the past.
So is there anything positive to report?
Despite the latest job figures, data suggests that inflation appears to be cooling and we are not seeing signs of a deep recession in the US yet. At just over 3 per cent, headline inflation is now at one-third the level of a year ago.
The Singapore stock market offers one of the highest dividend yields in Asia and has one of the most attractive valuations in the region in terms of the forward price-to-earnings ratio (about two standard deviations below the 10-year historical average).
The turbulence in the markets has seen a lot of liquidity flee to money market funds, given their higher and more stable risk-free returns. In the US, it is estimated that more than US$6.5 trillion (S$8.9 trillion) in cash is sitting on the sidelines.
If inflation plateaus and the Fed feels confident enough to pivot – possibly during the second half of 2024 – there is every likelihood that much of this money could flood back into the market. This happened at the end of the past four Fed tightening cycles, sending markets shooting to new highs within a year, and keeping stocks rising for three more years after that.
From a valuation, growth and yield perspective, Singapore equities look very undervalued. But liquidity remains a problem and needs to be addressed. That said, good stocks will outshine in the medium term. As one wit put it, sound and strategic investing is more akin to watching the grass grow than punting on a lottery. And as one analyst put it last week, anyone buying into S-Reits now is potentially looking at a yield of around 6 to 8 per cent in a year’s time, excluding capital gains.
Meanwhile, brace yourself for a more volatile market environment heading into the final months of 2023. And I’m not holding my breath for the usual Santa Claus rally this year.
