I can’t believe that it’s December already. 2019 just seems to have passed by in the blink of an eye.
Given that we’re approaching the end of the year, I figured this would be a good time to do a review of 2019, and take a look at what stocks or REITs have performed well this year. Past performance is no indicator of future performance of course, but it’s always fun to take stock of the year during Christmas period, and see what lessons can be learnt for the future.
Basics: Which are the Top 10 performing Singapore Stocks / REITs on the SGX?
I set one very simple ground rule for this exercise. The stock or REIT must have a market capitalisation of at least S$1 billion. This serves to filter out the smaller cap stocks that can have wild swings in prices, and may not even have sufficient daily liquidity to move large positions.
Since 2019 isn’t over yet, I’ve used the 52 week data as at end November 2019, so the performance quoted below is from Dec 2018 to Nov 2019.
And without further ado, here are the top 10 performing Singapore Stocks / REITs on the SGX for 2019.
52-wk %Pr. Chg.
Keppel DC Reit
Mapletree Com Tr
Mapletree Log Tr
Industrial & Commercial Services
Mapletree Ind Tr
So what can we take away from this exercise?
REITs are King?
The first thing that jumps out at me, is just how many REITs there are on this list. There’s Ascendas India, Keppel DC, Mapletree Commercial, Ascendas Hospitality, Mapletree Logistics, and Mapletree Industrial. That’s 6 REITs out of this top 10 list, or a whopping 60%.
Singapore investors are known to be crazy about REITs, and I can see exactly why. The performance speaks for itself. And don’t forget that the price change numbers above exclude the returns from distributions.
Mapletree the King of REITs?
The other interesting thing, is that out of the 6 REITs listed above, 3 are Mapletree REITs. That’s amazing because Mapletree only has 4 REITs, so it means that 3 out of 4 of their REITs are on the top 10 performing stocks of 2019. And when you realise that the last one is Mapletree NAC which is basically a Hong Kong REIT badly affected by the Hong Kong protests, then it seems like all the Mapletree REITs that weren’t affected by adverse global situations are here, which is pretty amazing indeed.
I’ve been a longtime fan of Mapletree REITs simply because I love the sponsor for the way they treat unitholders. I talk about Mapletree a lot in my investing course and I own all their REITs other than Mapletree Industrial (you can check out my holdings here). In fact one of the first articles on this site from early 2018 is how Mapletree Commercial Trust is probably my favourite Singapore REIT ever (back at 2018 prices though, less at these prices).
So the point is, I love Mapletree, and I think they deserve all the outperformance and premium the market is giving them. But they also had a fantastic year because all REITs have had a fantastic year, so it’s important not to confuse the two.
Why did REITs do so well this year?
A picture speaks a thousand words, so here’s the USD 10 year treasury (2018 till now) for you.
Why have REITs had a poor 2018 but a great 2019? As some famous guy probably said somewhere, “It’s all about the interest rates dummy”.
You can say what you want, but the Federal Reserve sets the tone for global monetary policy these days. And in 2018, the Federal Reserve was mad about hiking rates. They hiked rates a total of 4 times, for a total of 100 bps. That eventually led to the market meltdown in December 2018 (still remember that?).
Anyway, after that the Federal Reserve got spooked and changed it’s mind, so 2019 has been all about cutting rates.
Now officially the Federal Reserve only cut rates by 75 bps this year, and they’ve signalled that this is all there is. But the market doesn’t really believe that given all the negative economic and PMI data floating around, so the market is pricing in more cuts, which is why the 10 year treasury has fallen from almost 3.2% at its peak in 2018 to a record low of around 1.5% this year.
REITs are basically leveraged investments on real estate, so a fall in interest rates reduces interest rate expenses while rent stays the same, boosting yields. And blue chip REITs with high quality buildings can be viewed as a fixed income proxy in a way, so when the risk free rate (10 year treasury) falls, the same yield becomes more attractive. Oh and don’t forget that real estate capitalisation rates get compressed, so real estate prices go up translating into paper gains for the REITs.
Long story short, a falling interest rate environment is fantastic for REITs. 2019 was all about falling interest rates, so REITs have done fantastic.
How will REITs do next year?
To put things in perspective, for REITs to have a similar tailwind in the form of falling interest rates like it had this year, the US 10 year treasury will need to fall to around 0% next year.
Is that likely?
To be fair, in this world of topsy turvy negative rates, I wouldn’t say that it’s completely unlikely. But the risk-reward at this point is probably less compelling than it was back in 2018.
What will do well in 2020?
So what will do well in 2020? Sadly enough, the SGX these days is comprised mainly of REITs and a bunch of Temasek linked cos. And 2 banks.
So there’s just not a lot of choice there.
I think the finance sector is going to find it tricky in 2020. Economic growth is unlikely to pick up significantly, as is interest rates. That’s going to impact the ability of banks to make money.
The Temasek cos (with some notable exceptions of course) are having a rough few years. They seem to be struggling to find their footing in this brave new low interest rate, low growth, high tech environment where China is emerging as an EM manufacturing juggernaut. I think the recent wave of consolidations being done by Temasek is great stuff, but it will need some time before this shows itself in the form of improved earnings.
That leaves real estate as the lone bright spot.
The biggest tail risk to REITs at this point is a reversal in interest rate trends. If global growth surprises to the upside in 2020, the US 10 year may jump back up above 2% in a hurry, in which case these REITs are going to drop like a rock.
So the biggest question here probably is: Will global growth recover in 2020?
Now that’s a really tough call. You can ask 10 top economists and get 10 different answers.
My gut feel? I think there’s not going to be a US recession in 2020, simply because Trump is getting re-elected and he’s going to do whatever it takes to prevent one. And realistically speaking, as president of the sole superpower, there’s still a lot he can do to stave off a global recession.
But similarly, growth isn’t going to miraculously rebound because there’s still a lot of headwinds out there. You’ve got elevated global debt levels, poor demographics in most developed nations (too many old people), corporate rejigs to supply chains (to move out of China) and unlike in 2008, China is now transitioning their economy and unlikely to provide massive credit impulse to save the world this time.
If so, it’s just going to be a dull low growth environment at least until Trump’s election, and that may actually be pretty good for REITs and real estate.
But of course, I could turn out to be completely wrong on this, which is what makes investing so great. Let’s keep an eye on how 2020 turns out! As always, I’ll be sharing my thoughts on Financial Horse, so hope to have you guys along for the ride!
Note: This article is just a sharing of my thoughts, and I will not be updating the ideas contained here. For a more updated look on what stocks I am interested in, do consider checking out Patreon!
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