Disappointed with SReits / Thoughs on T-Bill bought using CPF-OA

 Link Reit (listed in HK) released its 1H results recently. Its DPU rose 3.7%. 

Better than most SReits:

- Mapletree Pan Asia Commercial Trust (MPACT) DPU dropped 11.6%

- Fraser Centrepoint Trust (FCT) DPU dropped 1%

- CapitaLand Integrated Commercial Trust (CICT) DPU rose 2.5%.

Most SReits have this syndrome of 'overseas acquisitions' to increase their AUM and fees for their reit manager. End of day, their overseas assets under-performed  compared to their SG assets. Not sure if this is SREIT's tuition expenses for their lack of competency / knowledge in overseas conditions.

A few weeks ago, I bought FCT at $2.28 using CPF-OA funds*, after a T-bill (bought using CPF-OA funds) matured. Now, it's trading at $2.11. On hindsight, I should be more patient and waited for lower share price. Nonetheless, I will keep the FCT shares, since I am buying it for dividend purpose. As long as FCT's DPU is stable (i.e. did not decline much), I will continue to hold it. 

*CPF-OA funds have restrictions in buying shares. It can only buy certain stocks listed in SGX. It cannot be used for buying shares in overseas markets. 

I have some T-Bills, that are bought using CPF-OA, maturing in Nov and Dec. After maturing, the funds will be shifted back to CPF-OA (which gives 2.5% interest). They will be my warchest to buy index ETFs, when there is a market crash (i.e. 20% or more drop) in future. 

Slight update

Share disposal and purchases

Sold the CCB and ICBC position bought a week earlier. 

Some of the proceeds are used to bought Glorious Sun, which have high amounts of cash and owns CCB, ICBC and BOC shares. (I wrote about Glorious Sun in an earlier post) I feel that Glorious Sun is more worthwhile compared to buying the China Banks directly.

Also bought a small position in Nameson Holdings (1982.HK). It is a knitwear manufacturer, trading at around 5.3x PE and more than 10% dividend. The position is bought for its high dividend yield. 

On T-Bill

I have a T-bill matured last week. Today, I put most of the proceeds back into this week's 6-month T-Bill.

This is because I already have some funds in money market fund and bond ETF (i.e. MBH). So I decide to diversify a bit and put the funds into T-Bill today, even though the T-Bill yield is likely not much (say 3% or slightly lower)

On Current Market

HK market has fall, following the peak on 5 Oct week. Correspondingly, my porfolio value also declined since 5 Oct week. 

Nonetheless, I am still holding on to my HK shares bought before Oct 2024. 

I will continue to hold on to those shares of quality companies. 

For shares bought for their yield / under-valuation only (i.e. not high quality business), I will sell some, if the share prices rise to hit my target prices or there is better opportunity elsewhere.

China Policy U-Turn

On 24 Sept 2024, China announced monetary stimulus which some described as mini-bazooka. 

Source: https://www.thinkchina.sg/economy/can-chinas-latest-stimulus-package-save-its-economy

Since then, China government is holding more press conferences. One was by NDRC which was disappointing. The other was held by China Ministry of Finance on 12 Oct 2024, which noted 

- more borrowings from China Govt to resolve the local govt debt 

- money raised from special bonds will be used to buy unsold homes and turn them into subsidised housing.

No numbers or new measures were announced, as new measures may need approval from their meetings in Oct later. 

More details: https://x.com/Sino_Market/status/1844960349130547641

Today (14 Oct 2024), there is another govt press conferenence on increasing support for companies. (See https://x.com/liqian_ren/status/1845647863188984221 )

From the above, there seems to be a U-turn in China policy. 

In 2021, there were the 3-red lines for property developers and tech  tech / education / gaming crackdown. 

Now there are monetary stimulus, more govt borrowings and hopefully, some fiscal stimulus in future. China is realising that its economy needs help and its people need more confidence in the economy. 

In medium term, I am hopeful of more support measures from China Govt, and China CPI should rise above 1% level. 

I am also hopeful that China/HK markets may have bottomed. There will be some volatility but we are unlikely to see lower lows. 

Rant: Forgotten

HSI rose 24.5% in past 2 weeks. 

China Aviation Oil (CAO) trades at 7x PE and benefits from China outbound travel. It rose only 7% in past 2 weeks! Why is this so? Because CAO is listed in SGX. 

TravelSky is listed in HK and it rose 33% in last 2 weeks. 

Singapore is a forgotten market. Especially for non-reit, non large cap stocks. 

Some purchases and sold options

Sold Call Option on Futu (call price $120, 20 Dec 2024) 

I sold call options on Futu. The quantity is 50% of my position in Futu. On Thursday, Futu reached $122. 

At $120, Futu is > 30x PE (TTM). Looks like my selling of called options have limited my gains for now. 

Bought ICBC and CCB

I watched Master Leong Youtube videos and had followed him in some buying CCB and ICBC this week. Did not buy Bank of China, as its share price ran up. 

The purchased stakes are not large, as earnings growth of China Banks is limited. 

Probably, it is a pychological purchase i.e. to relieve my FOMO on this China/HK bull run. 

Bought Conant Optical (2276)

Increased my position in Conant, as it is going to supply lenses for a MNC consumer electronic company and it is developing lenses for VR products. 

Its share price did not run up in this China/HK bull market.

Conant produces spectable lenses and have substantial sales that are exports. Its sales and profit rose in 1H 2024, partly due to appreciation of USD against RMB. Now, as RMB revalues, its profit may be affected.

Nonetheless, with ROE of 28% and stable growth rate for past few years, the current PE of 12.5x is not expensive. 

Thoughts

HK market is still rising this week (HSI up 11.2%), while China shares listed in US also rosed too. China Golden Week holidays ends next Monday. I expect inflows of funds from China into equities next week. 

If there is no further stimulus from China, the bull run may hit a wall near end of next week or in the week after. 

I will not be buying further into China / HK equities, as its weightage in my portfolio has risen to a rather high level. In the meantime, I am likely to let my positions run in the bear market. 

China/HK Market Rebound

HK/China market is on fire this week, as 

- China rolled out monetary stimulus package on Tuesday 

- China Poliburo held special meeting to discuss the economy, noting to stop property price from falling, discussing on employment and vowing to achieve 5% growth target

- China provided support to poor elderly and college graduates who were unemployed after 2 years. Also, Shanghai is rolling out $500m RMB of consumption vouchers. 

Over the past week, HSI rose 13.1%; CSI 300 up 15.7%

My stock portfolio

My stock portfolio have benefited from the raging stock prices, up 10% in the past week.

I had bought an small stake in Trip.com this week. Had wanted to buy when prices are at $47 but sold put option instead. With rising price, the put option is unlikely to be exercised. Hence, I bought at higher prices this week. 

Prior to this week:

- Sold partial stake in CNOOC (883.HK) at $18-$19, as oil price declines. Decided to hold just a small stake for diversification / inflation hedging purpose. 

- Sold China Overseas Properties (2669.HK) , as I was uncomfortable with the rising high receivables when compared to its sales. Would have gotten more money, if I held on and sold this week. 

- Bought Glorious Sun (393.HK). It is trading at around $1 but held cash worth $0.66 per share and China bank (such as ICBC, CCB and BOC) shares worth $0.82 per share. In addition, it is also paying out good dividend and buying back its stock. Downside is that its daily trading volume is not a lot. 

- Bought back Plower Bay (1523.HK) stake sold earlier on 5 Aug.

- Bought a small stake in LVMH (MC), as its share price fell below 200-MA (weekly). The stake is small, so that there is room to buy more if share price fell further. However, its share price rose this week, benefitting from rising sentiment in China markets. 

Notes to myself: Chinese low bond yields and share prices.

 Source: https://x.com/JeffWeniger/status/1823125112326926751

On Cash Changes, Samsonite, Noah Holdings and Yuexiu Services

Cash Changes

Have converted a portion of USD in IBKR to SGD, so as to hedge against USD depreciation. Withdrew the amount and deployed them as followed:

- Half in Manulife SavvyEndownment - 3 year guaranteed 3.4% pa

- 30% to subscribe to this month's Singapore Savings Bond which gives 3% pa for 10 years

- 20% to Moomoo Cash Plus (drop to 3.3% in 7-day yield)

The first two deployment helps to lock in 3+% for longer duration. The last deployment is to park the cash in SGD money market fund for future use. 

Samsonite Noah Holdings and Yuexiu  Services

Sold my Samsonite position at around 10+% loss, as I decide to deploy the funds elsewhere. The funds are used to buy Noah Holdings and add on to my position in Yuexiu Services.

Both Noah Holdings and Yuexiu Services are trading below its net cash holdings. 

Koneko Research has a good piece on Noah Holdings: https://konekoresearch.substack.com/p/noah-holdings-chinas-largest-private

Yuexiu Services (6626.HK) is a China SOE providing property management services. Its 1H 2024 results was released yesterday. Revenue and net profit grew by 30% and 12% respectively. Declared interim dividend of $0.10 HKD per share; payout ratio was 50%. 

Earlier in May 2024, it announced the intention to buy back 2% of its shares. In June and July, it bought back around 0.2% of its shares. Given its current market cap below its cash holdings and its actions to share its profits with minority shareholders, I have increased my position in Yuexiu Services. 

On Reits Leverage

 Based on The Edge report, Keppel Pacific Oak US Reit (KORE) management noted that 35% leverage is not viable. Instead, US Reits standard is 40% for decade.

Well, based on Nareit report, US reits leverage  (debt to market assets) are below 35% since 2012. 

Souce: https://www.reit.com/news/blog/market-commentary/us-public-equity-reits-insulated-mortgage-market-turmoil

This implies that 35% leverage is sustainable. 

However, most S-Reits have leverage ratio >35%. More leverage implies more fees and more funding to take on more assets from their sponsors. 

Hongkong's Link Reit is internally managed and had kept its leverage ratio below 25%. (5-year leverage ratios are available at here)

While higher leverage may potentially provide higher DPU (when interest rate is low), I would prefer lower leverage ratio to avoid regrets down the road. 

On Tencent, China Aviation Oil and Samsonite

Tencent drop 3.3% in US, after it announced 2Q 2024 results -- y-o-y growth of 8% in revenue, 27% in operating profit and 53% in net profit. 

China Aviation Oil reported its 1H 2024 results -- 20% growth in revenue and >100% growth in net profit. But its share price dropped by 1.5cents to $0.865.

Seems that sentiment for China stocks is quite bad. Good results, yet stock price falls.

Anyway, I increase my position in China Aviation Oil, in view that there will be more people flying in and out of China and hence growth in its trading revenue. 

Samsonite reported flat sales growth. In its earnings transript, it guided negative sales growth in Q3 and 1-2% growth for full year. Share price dropped > 12% today; PE ratio is at 8.2. 

In its earning transcript, it noted that 
- China is trending down less premium brand i.e. Samsonite and American Tourister; 

- China retail space had freed up. It is trying to get good locations to set up shops for its premium Tumi brand
- In India, American Tourister is its main product. Its sales had dropped due to competition. In medium run, it will try to steer customers to its upscale Samsonite brand.  

I have a position in Samsonite and will continue to hold the position, given the current PE ratio. Its sales while not great should stabilise in long run. I put in a bid at lower price of $17.90 but may not be filled. 

SRS, CPF OA transactions

 My SRS and CPF-OA are accounted seperately from my stock portfolio

SRS Transaction

Sold entire UOB position on 5 Aug 2024. Turn pessimistic on SG banks, as US Fed rate may be cut starting Sep 2024. 

On the funds from the sale, I am undecided on whether to put them in Singapore Savings Bond (SSB) or Cromwell Reit. 

CPF-OA Transactions

I had monies coming back from the maturity of T-Bills. Had bid 1-year T-Bill at 3.5% ecently but it was unsuccessful.

Also sold AEM at a loss of $1.56. I am scared off by the drop in price. Probably should have cut loss earlier. 

The funds are deployed to 

- NikkoAM-StraitsTrading Asia ex Japan Reit ETF (CFA) at $0.775. Reits will benefit from the upcoming US Fed cuts

- NikkoAM SGD Investment Grade Corporate Bond ETF (MBH) at $0.769. 

I did not use the funds to buy T-Bills, as its yield (on the last 6-mth T-Bill) dropped to 3.4% and the yield may dropped further, if US Fed interest rate drops more in future.

MBH ETF should provide 3+% interest for sometime, given its weighted duration of 5.6 years. Furthermore, its price may benefit from decline in SG interest rate.

Also recently sold index fund holding (Infinity Global Stock Index C SGD), bought using CPF-OA, a few years ago. The monies have not returned to CPF-OA yet.

On US Fed Rates

Current Fed rate is 525-500. Based on CME Fedwatch, Fed rate may decline by 1% at end of the year. I am not certain if Fed rate will decline by this extent. To be conservative, I assume 0.5% cut by end of the year and probably another 0.5% cut by mid-2025.

Source: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

On US GDP numbers

Bloomberg economist, Anna Wong, has an interesting twitter thread, showing 1Q 2001 GDP growth was  2.0% initially and then revised down to -0.6% 4 quarters later. 

Source: https://x.com/AnnaEconomist/status/1820894752759541778

She has an subsequent post (https://x.com/AnnaEconomist/status/1820922117518442501), saying that policymakers need to consider that the economy is slowing down more than the data appear. 

(Of note, 2Q 2024 US GDP growth is 2.8% annualised now.)

On China Economy

Richard Koo (economist on balance sheet recession) noted that 

- China is in balance sheet recession. But it is in difficult position, as its 2022 govt budget deficit was 7%, before the balance sheet recession. So the govt may not be willing to roll out big stimulus. (link)

- To fend off the balance sheet recession, China govt should borrow more, as there is no borrower besides govt in balance sheet recession. A committee comprising of smart people should be set up to identify good projects for Govt to spend on. (link)

    - Good  projects are those with sustainable social returns more than the cost of capital. As the returns are sustainable, the money spent on such projects will not be wasted

    - Cost of capital refers to long-term govt bond yield which is 2.4%.

    - The projects need not be infrastructure project. For example, for Spain, a project to teach english to their tour guides could be worthwhile, as this will help their tourism.    

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China 2Q 2024 GDP is 4.7%. Its Jun retail sales growth is weakening at 2% growth. 

- Luxery brands noted abysmal sale growth in China in 2Q 2024. 

- Chow Tai Fook Jewellery Group has 20% decline in sales in 2Q 2024. 

- Jiumaojiu announced profit warning for 6 months ending Jun 2024. (Jiumaojiu operates Tai-er, Song Hot Pot restaurants) 

---------------------------------------------------------------------------------------------------------------

China is rolling out measures:

 Monetary measures

Cut 1-yr MLF by 20bps to 2.5%. Cut 1-yr and 5-yr LPR by 10bps. https://x.com/Sino_Market/status/1816284949072191699

Fiscal Measures

$300b rmb special bond fund for trade-in program, lower requirements. https://x.com/Sino_Market/status/1816376732565528745

SOE investing 3 trillion yuan over next 5 years to upgrade equipment and renovations. https://x.com/Sino_Market/status/1816676718872264828

I guess that China will not roll out any large stimulus for consumer consumption, as it could be too wasteful given their budget constraint. 

On Index ETF

Selling VWRA 

I hold two Global index ETF (accounted seperately from my stock portfolio), such as :
- VWRA (Vangard FTSE All-World UCITS ETF USD Acc)
- JPGL (JPM Global Equity Multi-Factor UCITS ETF - USD acc)

I sold VWRA yesterday, because 
- US stocks are quite overvalued and 63% of VWRA are of US stocks
- Mag 7 (excl Tesla) are top 6 holdings of VWRA accounting for ~16%. 
NASDAQ has been falling the past week, as funds are rotating out of tech into stocks 

who may benefit from possible interest rate cut in future. 

For JPGL, I am holding on to it for now, as it is quite diversified. It's largest holding account 

account for 0.34% only. And its tech exposure is only 8.3% of portfolio. 

Other (local) ETFs holdings

I also hold three local ETFs (accounted seperately from my stock portfolio):

- STI ETF 

  

This was bought using SRS funds. Most of the purchase was done before Covid. STI ETF is yielding 4% currently. It is a long-term holding, as SRS options are limited and it is good to have some holdings in SG stocks when I am liviing in Singapore. 

- NikkoAM-StraitsTrading Asia ex Japan Reit ETF (CFA)

 

This is bought recently using CPF funds at $0.759, as CPF options are limited. I have blogged about the purchase earlier.

- NikkoAM SGD Investment Grade Corporate Bond ETF

This is bought using cash and CPF fund. It is bought for bond allocation purpose. From its May 2024 factsheet:

Improve Singapore stock market -- Put 5-10% of CPF Life funds into SGX listed equities

There's talk of improving returns of Singapore stock market nowadays (see CNA article) by

- Improving corporate governance

- Asking our sovereign funds (Temasak Holdings/GIC) to invest more in Singapore stocks. (Govt said no - article link)

- Getting quality firms to list in Singapore, which has very few new listings nowadays

I would, however, suggest that Govt put in 5-10% of CPF Life funds into Singapore stocks. It can be done in stepped manner e.g. put 1% of CPF Life funds into SGX equities every year until it hit desired X%

- This will boost returns / liquidity for Singapore stocks.

- This will enhance long-term returns of CPF Life fund, as CPF Life fund is an annuity fund that will last for a long time. This long duration is suitable for some of the funds to be deployed into Singapore equities which is likely to beat or be in line with 4% returns in the long run* but has short-term volatility

*Based on STI ETF webpage, 10-year annualised returns (ending Jun 2024) of STI index and STI ETF is 4.24% and 3.82% respectively. The annualised returns since the start of STI etf is 6.46%. 

- Compared to other countries, Singapore stocks tend to have higher dividend yield and lower volatility. This makes it appealing for annuity funds such as CPF Life fund (and income-seeking investors too). 

China Aviation Oil (G92)

China Aviation Oil (SGX: G92) supply/trades jet fuel and owns 33% stake in Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA). 

To me, it is a play on China recovering outbound travel (i.e. more outbound flights = more jet fuel supplied + higher profit for SPIA ). Based on aastock article , current chinese international passenger traffic is only 88.1% of 2019's. Hence, the recovery in outbound travel has some way to go.

Currently, China Aviation Oil (CAO) trades at $0.88, which is around LTM 9.5x PER. Net cash per share is around $0.58. 

It's 2023 profit was $59mil. In 2016-19, it's profit ranged from $85mil to $99mil. So if CAO's profit could recover to 2016-19 level, the share price is likely increase accordingly. 

(Note: I am vested in CAO.)

1H 2024 Notes

 1H 2024 Performance

Stock portfolio acheive 17% returns in 1H 2024. This is due to 

- HK market recovery, as 70% of portfolio are in HK stocks.

- Pivot to strategy of buying HK small caps with growth potential at reasonable prices (or growth at reasonable prices). Also had stocks with negative Enterprice Value (when bought - e.g. Cosco Ship Intl (sold), Yuexiu Services) and good diviend yield

Regrets

Sold some CNOOC stocks at $13. Now CNOOC is at $23.

Worse the sold CNOOC funds are used to buy China Ovs Ppt at high price. Now, I am holding China Ovs Ppt at >15% losses. 

Samsonite reached $30 earlier in the year due to rumors of privatisation. On hindsight, I should have sold some then. Now it is at $22-$23. 

Hopeful on China Property Services Stocks

While China property developer  stocks are crashing, I am hopeful on China property services stocks.  This is because 

- I view China property services companies akin to Singapore companies providing S&CC services to HDB flats; these services are like day-to-day necessities. Hence the revenue of property services companies should be stable. 

- China property services companies have enjoyed good growth in recent years. 

- Valuation of China property services companies are not high, as sentiment is affected by China property troubles. 

I am holding 2 stocks on China property services stocks i.e. Yuexiu Services and China Ovs Ppt. They are China state-owned companies. I avoided private property services companies, as they could be affected by the poor state of parent developer company.

On Dividends

I started investing in 2005. I did not pursue dividend investing intentionly. 

Over the 19.5 years, around half of my stock portfolio returns are from divdends. Dividends help to stabilise the stock returns. When returns are poor or negative, dividends income had held steady to some extent. When returns are good, the returns are mostly from capital gains and not so much from divdends. 

Cromwell 1Q 2024; Buying CFA Reit ETF and AEM Holdings using CPF-OA

 Cromwell 1Q 2024 results

Cromwell's 1Q 2024 DPU dropped 10% to 3.5c euro. 

More interesting, one of its presentation slide noted that interest expense will increase by $6.9 mil, if its all-in interest rate increse from 3.28% to 4%

This suggest that if interest rate increses to 4%, the DPU may drop by ~10% and the dividend yield will be around 8.5% at current price of $1.47 euro. 

We can use this 8.5% dividend as lower bound (or worst-case DPU), as EU is likely to cut rate in June or 2H 2024. 

I have a small stake in Cromwell. Will continue to hold the position, unless I can find better opportunities.

Buying CFA Reit ETF using CPF-OA

Recently, I bought a small position in NikkoAM-STA ex Japan Reit ETF (CFA.SI) at $0.761 using CPF-OA funds. 

The buy reasons are
1) to higher yield offered by the Reit ETF compared to T-bill (3.7% - 3.8%). 
2) the current ETF price may have reflected the higher-for-longer interest rate environment. 

I kept the stake small, as S-Reits DPU may drop further due to higher interest expense.

Buying AEM holdings using CPF-OA

I also bought a small position in AEM at $2.35 using CPF-OA. 

The buy reasons are
1) AEM is in semi-conductor testing industry which is in downturn. In its 2023 AGM slides, AEM predicts recovery in test equipment utilization in 2H 2024 or 2025. Hence, its results in 2025 will be better.

2) Its 2023 AGM slides also noted that as chips get more complicated, more testing is required. This means more business for AEM in medium term. 

The stake is also kept small, as semi-con is cyclical and I cannot tell when AEM results will recover. 

80% of CapitaLand China Trust debts are in SGD

Earlier, I noted that Chinese reits have debts in non-RMB (link). 

CapitaLand China Trust's borrowings are mostly in non-RMB too. In fact, 80% of its borrowings are in SGD. So when SGD is getting stronger while RMB is getting weaker, the leverage and the amount of interest payments rose. 

CapitaLand China Trustowns assets in China. Its gearing is 41.5%. 

Based on 2H 2023's DPU of 3 cents and share price of 0.695, CapitaLand China Trust dividend yield is around 8.6%. 

Will give CapitaLand China Trust a miss, as I don't like the currency mis-match in its debts. 

Why own S-Reits, why not own HK developers?

Singaporeans are familar with S-Reits, especially since S-Reits has been a good asset class to own in last decade till 2022.

However, in the current high interest rate environment, S-Reits share price have been falling recently. Similarly, HK developers share price also have been falling. 

Currently, some HK developers may be offerring higher yield with lower leverage, compared to S-Reits. 

Let's compare with same examples.

NikkoAM-StraitsTrading Asia ex Japan Reit ETF (CFA.SI)

Current share price: 0.745

Dividend Yield: 6.3%

HongKong Land (H78.SI)

Current share price: USD$2.90

Dividend: USD$0.22

Dividend Yield: 7.6%

Gearing ratio (from its FY2023 slides): 17%

Hang Lung Properties (101.HK)

Current share price: HKD$8.17

Dividend: HKD$0.78

Dividend Yield: 9.5%

Gearing ratio (from its FY2023 slides): 31.9%

Note: I have shares in Hongkong Land and Hang Lung Properties.

Both Hongkong Land and Hang Lung Properties are developing new malls/offices/hotels in China; they will be progressively completed between 2024 - 2030. So, their recurrent rental income could rise in coming years. 

Thus, compared to S-Reits, it could be more worthwhile to hold HK developers with higher yield and lower leverage. 

Not optimistic on S-Reits

I am not optimistic on S-Reits, as I think that US Fed rate may not decline by much this year. 'Higher (rates) for longer' lead to higher finance cost and hence lower DPU for S-Reits in general. 

Larry Summers (see link to video below) noted that Fed should not cut rates given current config of low unemployment, strong economic growth and the recent CPI data

https://www.youtube.com/watch?v=LXDNZuYUn-o

I had sold my stakes in United Hampshire Reit earlier in March 2024.

Currently, I only has stake in Cromwell, which is a European Reit. EU is more likely to cut their interest rate given its weak economic growth and lower inflation of 2.4% in March 2024. 

Equity Risk Premium in US market

Equity Risk Premium (ERP) refers to the additional return over risk-free interest rate for holding equity. 

ERP can be computed by taking earnings yield (inverse of P/E ratio) minus risk-free rate. 

Current Fed rate and Current PE ratio

Risk-free rate = Current Fed rate = 5.25-5.5%. Let's take 5.25%.

Current S&P P/E ratio = 27 (it's around 27-28. Let's take 27).

S&P earnings yield = 1/27= 3.7%.

ERP = 3.7% - 5.25% = -1.55%

Current Fed rate and Forward PE ratio

Risk-free rate = 5.25%.

Forward S&P P/E ratio = 23

S&P earnings yield = 1/23 = ~ 4.35% 

ERP = 4.35% - 5.25% = -0.9%

Forward Fed rate and Forward PE ratio

Forward Risk-free rate = 4.25% (assuming 4 Fed cut by end 2024)

Forward S&P P/E ratio = 23

S&P earnings yield = 1/23 = ~ 4.35% 

ERP = 4.35% - 4.25% = 0.1%

So, the ERP for US equities is either negative or flat. This implies that investors are very confident on the US market that they require no additional return over risk-free rate to hold US equities. If ERP is negative, investors are 'paying' to hold US equities. 

In short, US equity market seems overvalued, based on ERP. 

(Of course, S&P can still have good returns in 2024, if the sentiment for US market is very good or Fed rate will have more than 4 cuts. I do not know how markets will perform in the future. )

S-Reits and what if higher-for-longer interest rate persist

Based on InvestingNote's tracking, out of 44 S-Reits / Biz-Trust, more than half (or 26) reported lower DPU (dividend per unit) compared to the previous year's.  

The lower DPUs can be partly (or mainly) attributed to high interest rate environment. 

What if US Fed does not cut interest rate or the cut is smaller than expected, and the interest rate continue to hold at around 4% level. 

- First, S-Reits' DPU may continue to suffer, as many S-Reits may hedge their interest cost earlier and have not borne the full blunt of the higher interest rate. Hence, when they need to re-finance their loan, they need to incur higher interest cost and lower DPU.

- Second, Singapore (and Hong Kong) properties tend to have low capitalisation rate (cap rate). If the higher for longer environment persist, say, 5 years, the cap rate may become higher and hence lower the valuation (or NAV) of the properties undering S-Reit. Lower valuation will lead to higher leverage ratio (as borrowings remain unchanged). If leverage ratio gets too high (e.g. 45% or more), the S-Reit will be in trouble. 

I do not know how US interest rate will unfold moving forward. But I will keep my reits positions small. 

14 Mar update: IFAST has a good article in Nov 2023 on how high interest rates may affect S-Reits  in near future.  https://secure.fundsupermart.com/fsmone/article/rcms282441/be-selective-in-s-reits-as-rates-stay-higher-for-longer

Musing on Keppel Pacific Oak US Reit

Keppel Pacific Oak US Reit (KORE) announced suspension of dividends this week for 2H 2023 - end 2025. This is becaue they need to conserve cash for capex for office improvements and reduce debt. This caused the share price to drop sharply from $0.25 to $0.15.

As noted earlier, I sold KORE at $0.315 (missing the subsequent run-up to $0.36), as I was not comfortable with US office risks. 

Given that KORE has suspended its dividend, if I want to buy it again, I will wait for price to drop to $0.10, which is at 15% of NAV. The lower price is to compensate for the lack of dividends and the US offices risk. 

Nonethless, I have switched to avoiding companies in net debt lately, after reading 'What I learn from Investing from Darwin'. The book is great and espouses on 'avoid risk, buy quality companies and hold' based on evolution ideas. The book can be borrowed as e-book from NLB. 

Chinese Reits having non-RMB debts

I was looking at Yuexiu Reit and found that majority of its debts are not in RMB but in HKD / USD. This implies that when RMB depreciates against USD, the reit will suffer from forex losses, unless the reit has hedged against forex movements in advance. 

Yuexiu Reit's financial expenses had rose from $400mil rmb in FY2021 to $1,500mil rmb in FY2022 and the increase was mainly due to forex losses (as RMB depreciates).

I looked at Hang Lung Properties and found that it has ~70% of its debt in HKD, despite it owning large number of Chinese properties. 

Sasseur Reit (listed in SG and owns retail outlet properties in China) has 46% of its debt in USD or SGD. 

I find it strange for Chinese reits or developers with mainly Chinese properties to have large non-RMB debts. I suspect that the lower interest rates (and lower interest payments) of non-RMB debts prior 2022 has made it attractive to issue debt in non-RMB. Especially since the benefits of lower interest rates can be quantified while the forex risks cannot be easily quantified.