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Go for REITs and bonds amid geopolitical worries and persistent inflation: UOB Asset Management

Samantha Chiew
Samantha Chiew6/16/2022 03:21 PM GMT+08  • 7 min read
Go for REITs and bonds amid geopolitical worries and persistent inflation: UOB Asset Management
The pandemic has disrupted supply chains and before things can be normalised the war between Russia and Ukraine broke out and further lifted prices of commodities ranging from oil to agricultural products. Photo: Bloomberg
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Many over the world are feeling the pinch of inflation and stagflation, which have hit multi-year highs in many countries, including the US which has raised hikes its benchmark interest rate by 0.75 percentage points last week, the biggest increase since 1994.

US inflation, measured by the Consumer Price Index (CPI), is already at its highest level in 40 years and there are worries it might even increase further.

Already facing supply chain woes due to the Covid-19 pandemic, many countries were busy preparing to reopen their economies in the first half of 2022 when they were hit by the Russia-Ukraine war which sent food and energy prices soaring.

Meanwhile, China’s imposition of tariffs on fertiliser and pork imports while lowering domestic steel production to meet decarbonisation goals also exacerbated the supply chain problem and inflation.

Higher cost for everything

See also: UBS: Strike balance between value cyclical and reopening beneficiaries in China

However, Asia is faring just a tad bit better than the US in terms of food inflation, according to UOB Asset Management (UOBAM).

“Over in Asia, the food inflation picture appears tamer, for now. However, there are signs that Asian economies’ resilience to higher global prices is coming to an end,” says the wealth and asset manager.

In Singapore, the price of everything from chicken rice to petrol is increasing. The republic’s GDP is expected to expand by 3.8% this year, according to professional forecasters surveyed by the Monetary Authority of Singapore (MAS) in June. The most likely outcome is for the Singapore economy to grow by 3.0% to 3.9% in 2022 with an average probability of 43.6%. In 1Q2022, Singapore’s economy grew by 3.7% y-o-y.

CPI-all items inflation and MAS core inflation are expected to come in at a respective 5.4% and 3.5% in 2Q2022. For the full year, the median CPI-All Items inflation is forecast to come in at 5.0%, up from the 3.6% expected in the March survey. MAS core inflation is expected to come around 3.4% for the full year, up from the previous estimate of 2.0%.

See also: Using specialised machine learning to hedge against economic uncertainty

The respondents forecast that 2022 CPI-all items inflation will most likely come in between 4.5% and 5.4%, encompassing two probability ranges. Respondents had assigned the highest probability to the 3.5% to 3.9% range in the previous survey. Meanwhile, respondents in the current survey expect MAS core inflation to come in between 3.0% and 3.9%, also encompassing two probability ranges.

Singapore’s cost pressures have also been persistent throughout 2022, forcing the central bank to tighten monetary policy and revise expectations of price growth. This could affect Singapore’s recovery from the Covid-19 pandemic.

The higher cost of everything from raw materials to manufacturing will eventually be passed down to consumers. But it appears that this process has not started in earnest, according to UOBAM. There are fears that inflationary pressures may get worse before getting better. The April CPI report by MAS warns that this pass-through process is set to intensify, resulting in “core inflation significantly above its historical average through the year”.

While the Singapore government is hopeful that nominal wage growth will outpace inflation this year, several economists expect prices to remain elevated throughout 2023.

Inflation hedges

With such volatility in the market, it is no surprise that investors are unsure about where to put their money. In times like these, many may believe that “cash is king” but the currencies of several countries have fallen in value too.

Equity markets have taken a hit too. From the start of the year to June 15, the S&P500 has fallen 21.0% while the Nasdaq declined 29.9%. Meanwhile, MSCI World, MSCI Emerging Markets and MSCI ACWI World Index have all declined between 12% and 13% as at end April.

For more stories about where money flows, click here for Capital Section

How can investors then invest their money and hedge against the rising cost of living? Some industries that UOBAM likes include the food and agricultural sector. These include fertiliser producers, food manufacturers, palm oil plantations and farm equipment companies.

However, with interest rates expected to rise, investors are unlikely to keep up with the pace of price hikes in everyday goods. They should then seek regular investment income, whether through equities, higher-yielding bonds or REITs, to counter the impact of higher monthly grocery and restaurant bills.

“Faced with rising inflation, consumers are looking for ways to maintain their spending power. These include investing in income-generating assets such as bonds and REITs,” says Chong Jiun Yeh, chief investment officer, UOBAM.

“This helps to support the bonds and REIT markets, which, in turn, attracts more investors. Barring any aggressive rate hikes, such an inflation-protected investment strategy may be one of the key factors supporting bond and REIT funds growth in the long term,” he says.

Investors are also advised to look into income funds, as these investment products select specific investments that are designed to deliver a steady and consistent income over time.

While growth stocks do produce higher returns through capital appreciation compared to income investments, over the long run, the difference between the two is not as great, especially in times of extreme market volatility like today.

The volatility also makes it tough for traditional fixed-income funds to deliver consistent returns. UOBAM says the best way to navigate this is to use a laddered investment strategy, investing in investment-grade bonds with different maturity dates across a timeframe.

This way, investment maturities of bonds are spread across the allocated time frames to enhance the overall return. This strategy works both in environments of rising or falling interest rates.

UOBAM’s United SGD Fund is one investment that could offer stable returns while staying in a low-risk zone. Another is its United SGD Money Market Fund which invests in liquid and high-quality, short-term debt securities and money market instruments.

REIT for the risk-averse

Meanwhile, REITs have always been known to be a steady and stable investment. It has always been a go-to for risk-averse investors and is known to be an especially good hedge against inflation, even in a slow-growth economy. This is because developers can charge higher rents and are less tied to the business cycle.

Although the REIT sector was not spared from the price correction as markets reprice the front-loading of central bank interest rate rises and rising bond yields, UOBAM believes its fundamentals remain supportive.

“Sector valuations post the rebasing remain relatively attractive and conditions supporting a strong REITs sector earnings growth outlook are largely intact,” says UOBAM.

“We believe REITs still present an attractive investment proposition from a total return perspective, with a combination of stable dividend yield supported by cash flow and upside potential for capital values. Our approach is to use both fundamental screening and valuation overlay to identify REITs with relatively more sustainable recovery paths, fewer concerns on financing risks, and better yield-plus-growth trajectories,” it adds.

One such fund by UOBAM that has delivered consistent total returns is the United Asia Pacific REIT Fund, which has outperformed the broader equity market in the region over the long term. With the fund, investors can ride the Covid-19 recovery as tenant demand continues to see improvement across most sectors and leasing momentum is expected to pick up. Growth will also be well supported by cyclical uplift in rents from the normalisation of economic activities and abatement in rental waivers.

Meanwhile, the UOB APAC Green REIT ETF is the world’s first APAC Green REITs ETF that focuses on the increasing demand for green buildings and practices by replicating the iEdge-UOB APAC Yield Focus Green REIT index.

Photo: Bloomberg

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