STI experiences correction as high risk-free rates cloud outlook for S-REITs

The Straits Times Index lost 61 points on Friday, Jan 10 to end at 3,802 and up one point week-on-week. On Jan 8, the STI made a new high of 3,886.  Just a week earlier, on Jan 3, the index was challenging its resistance area at the 3,800 to 3,822 level, breaking out during the week of Jan 6-10. However, the breakout was shortlived.

Nonetheless, directional movement indicators remain intact. ADX is rising and the DIs are positively placed. An earlier breakout of 3,640 on Nov 7 indicated a measuring object of 3,980, and this remains valid. Quarterly momentum is trending sideways despite the STI’s retreat. These indicators suggest that the STI is likely to remain resilient despite its near term retreat.

The 50-day moving average is currently at 3,760. This is likely to act as a support line. A break below this moving average does not imply that the uptrend has been violated, but it could indicate a longer consolidation phase. Clear negative divergences between smoothed RSI and index have developed, but RSI has not broken below its equilibrium line.

Higher for longer clouds outlook for S-REITs

US risk-free rates remain high. The 10-year Treasury yield was at 4.7% on Jan 10, its highest level since April 2024. The 2-year Treasury was at 4.291% while the 30-year was at 4.93%. Meeting minutes of Dec’s FOMC meeting released on Jan 8 showed that Federal Reserve officials were worried about inflation and the impact of President-elect Donald Trump’s policies, and indicated that they would be moving more slowly on interest rate cuts in 2025.

A Jan 9 report by JP Morgan concurs with this view. “We see a foggy near-term outlook for S-REITs heading into the upcoming reporting season, with market expectations of Fed cuts reduced to 1-2 from 2-3 post more hawkish Fed commentary, and concerns among some investors of US bond yields hitting 5% or higher and USD strength,” JP Morgan says.

Despite the higher interest rate environment, JP Morgan believes that there opportunities in S-REITs. DPUs could rebound as borrowing cost pressures ease. “We recommend investors anchor their portfolio with growth compounders CapitaLand Integrated Commercial Trust C38u and Frasers Centrepoint Trust J69u, Keppel DC REIT, Mapletree Industrial Trust Me8u, and Mapletree Logistics Trust M44u,” the report suggests.