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Economists, analysts trim rate hike forecasts, limiting STI’s downside

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Economists dial down rate hike expectations, supporting STI because of higher banks and REIT weightage

Economists at Julius Baer are trimming rate hike outlooks: “We recently trimmed down our expectation for the first hike on 16 March to 25 basis points (bps), as the probability of a 50 bps hike dwindled. From there, we continue to expect further 25 bps hikes to 1.25% at the following meetings in May and June, before pausing as inflation starts to recede.”

In an update on March 10, Jonathan Koh, an analyst at UOB Kay Hian who was expecting a total of 8 rate hikes is now anticipating just 4. “With conditions in the labour market having improved and higher inflation remaining a threat, the Fed is expected to kick-start the interest rate upcycle with a hike of 25bp during the upcoming FOMC meeting on 15-16 March. We expect a series of four hikes with the Fed Funds Rate reaching 1.0% by end-2022 (unchanged). We expect no hikes in 2023 (previous: four hikes),” he says.

Rate hikes are positive for the local banks. However, Koh of UOB Kay Hian has lowered his price target for DBS Group Holding by 10%, to $35.80. On the other hand, fewer hikes than some earlier forecasts is less negative for S-REITs.

The Straits Times Index has a higher weightage towards banks and REITs, unlike the MSCI Singapore Index which included Grab Holdings and Sea Inc so that tech stocks have a larger representation. Hence, The STI should be able to rebound faster than the SiMSCI simply because tech stocks tend to thrive in a low interest rate environment and are sinking on expectations of rate hikes.

Some S-REITs have leases linked to inflation, which could support DPU and DPU yield in the event of the rate hikes. Interestingly, REITs with office assets have done better since the start of the year up by between 5-10%.

No surprise then that the STI gained signficant strength against the Hang Seng Index during Mar 7-11. It managed to establish an initial support level at the March 8 close of 3,148, a 2-month low. Immediate resistance is near current levels. The STI ended the week of Mar 7-11 at 3,249. Despite this underpinning, sentiment is fragile. As a result, prices may ease in the week of Mar 14-18 and the STI could slip back to 3,148 as the current rebound is unlikely to sustain.

The Hang Seng Index has slipped below a support and its 50-, 100- and 200-day moving averages, losing 9.8% since the start of the year.

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