Friday, 6 December 2013

What will happen to S-Reits in 2014?

Again, every time when there is good news from the US job market, it means Fed QE tapering comes nearer. Hence, bond yields jump and dividend-play counters suffer.  

From the latest job statistics and trends, it is safe to bet that Fed will take real action to taper QE in 2014 sooner or later, although that does not mean Fed rate will increase at the same time. In fact, Fed seems to keep rate low for some longer while. Nevertheless, tapering is enough to cause damage to dividend-play counters. 

S-Reits are going to face headwinds in 2014.

The Reits' prices have already been waving down. Trend line for almost all reits are pointing firmly down. In 2014, the prices could keep breaking the low record. But the challenge will be totally different from last time in GFC. Unlike last time, most S-Reits should not have survival problem, especially for those backed up by strong sponsors. Rise in interest cost will take some time to kick in, as many S-Reits need not refinance in 2014. Quite a few reits may even manage to lift DPU in 2014. NAV may not drop so drastically. Instead, NAV may be steadily rising in 2014. But that does not mean the price will go up accordingly. Mr. Market has been turning away from S-Reits. The rising momentum is over.  

Reits with low dividend yield may feel more pain due to interest rate sensitivity risk. Akin to bond, when int rate rise, lower yield face more price drop. Besides, it seems that institutional investors are dumping some reits now, the same as they are doing for bonds. As a result, there could be better entry points in 2014 for long term value investors.

What should you do if you have already vested in Reits?

For those who have vested before the great surge, i.e deep in-the-money now and enjoying highest yield, the best strategy is simply to hold, unless you have better or emergency use of funds. These investors are the most happy group, and what they need to do is absolutely nothing but rest. It is the best illustration of the rewards for doing the right thing at the right timing!
For those who have vested in less-than-ideal prices, you should review your portfolio, and ensure that you have adequate level of cash reserve. If not, you should consider liquidating some during the temporary bouncing up.

In any cases, during a down trend, do not lose your sensibility to jump in too prematurely. Averaging down is a losing strategy. It wastes out your bullets. Most retail investors are with limited fund. Hence, every transaction needs to be made with thorough calculation.  There is a fine line between " at this lower price, value emerges" and " how can one not buy at this price level, it is already dropping so much, can't go lower lah! "

For all investors, it is strategically important to always keep cash to prepare for the crash. It is sweet to embrace bear market only when you still have money in pocket. It is fair to say that no one would know the bottom. We don't need to buy at the lowest price, just enter in the lowest price range will suffice.

Which Sector or Counter are to buy/sell?

When market is down, every counter follows regardless of their own characteristics. Fundamental analysis stops working when market is frenzy.

Forget the analysis reports telling you that "counter xxx has up potential and the target price is xxx". It is very likely that the report is to cover the institutional investors to retreat. It is not uncommon to see a counter's price keep dropping and brokers keeps shouting "buy".

Despite their difference in property sector, size, location, sponsor structure, etc, S-Reits are by and large the same investment category and now they are facing the common deciding risk factor --- interest rate rise!  So when they are down, they will behave more or less the same way. I am not saying stock selection does not matter at all. But under this circumstance, asset allocation weighs more than stock selection in contributing to the portfolio return. i.e. how much money you allocate to reits is more important than which reits you select.

I am currently vested about 40k in Reits. 10k in dividend stocks, and 160k in cash. I intend to maintain this level and closely monitor the market to make adjustments in gradual steps.

Mark this quotation from Sun Tze's Art of War:
a would-be victorious army ensures victory before engaging the enemy. A would-be defeated troops will engage his enemy first before looking for chances of victory.

Related Posts:
1. Dividend Investor Wisdom - Art of War by Sun Tzu
2. S-Reits insulated from rising rates?
3. Reits' Better Liquidity is a Risk?

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