In the past few weeks, the Covid-19 crisis has flooded all the mainstream media. Despite the recovery in China after four months since its first outbreak, the situation has worsened in most of the countries globally. Various governments, including Malaysia, Taiwan, Australia, Europe have announced lock-down and travel ban in the coming weeks.
Together with the recent oil shock, the impact on the stock markets is huge. The global stock market has tanked over the weeks. On Mar 9, the three main US indices dropped by more than 7% in a single day, with most of the other global markets suffered a severe contraction. Straits Times Index (STI) has dipped 36% since its previous high in 2018. The last time the index hit the 2,400 level was more than ten years ago. Almost all sectors are affected, with hospitality, airline, REITs, manufacturing, Retail and F&B taking the highest impact.
The good news is most of the governments start rolling out massive stimulus policies to support the economy. US Federal Reserve has dropped the interest rate to almost zero percent and Trump announced a trillion-dollar stimulus package to fight against the Covid-19 pandemic. With all the stringent measures implemented and with the experience in China and South Korea recovery, the epidemic will likely to burn out in the coming months. In both of those countries, strict restrictions on travel and large-scale events succeeded in reducing new infections to a small number within a month. While there could be another wave of epidemic in South Asia and Africa, the experience learnt in China and South Korea could potentially help to ease the situation.
Having said that, we believe that the economic and financial damage caused by the virus will continue to deepen. The travel restrictions and total lock-downs across the world are a big hit to the global economy. All travel-related and the brick and mortar business will suffer. While there was a pick-up on online purchase over the weeks, but consumer spending will eventually burn out due to the loss of income as most of the countries are currently in the lock-down and stay-at-home mode. Many airlines are on the verge of bankruptcy due to the collapse in air travel in the past few months. In short, the situation would be unpleasant for the world economy.
Singapore REITs have not been spared from the global market crash. Most of the REITs have suffered a 20% to 30% drop recently. We will likely to see the drop in occupancy rate and rental income in the coming months. Besides, some of the smaller REITs might have issues on refinancing as a result of the credit crunch.
However, the recent crash has bumped up the REITs' yield, with more than half of them are trading at double-digit yield currently. And the price to book ratio has dropped to the historically low level (very cheap valuation). While the rental income might fall in the coming months, we believe that this could be just a short-term and temporary shock.
Our REITs advanced portfolio is not spared from suffering losses as well. We were down by almost 40% in the recent crash. Fortunately, we have lowered down our leverage ratio to 1.5 during the recent portfolio rebalancing in January. There was no margin call yet (finger crossed). However, the recent crash increased our leverage to close to 1.9. We would observe the margin ratio closely in the coming weeks.
At this critical juncture, there are a few different actions that investors can consider:
Liquidate some stock holdings and wait for recovery
Hold and do nothing
Take this opportunity to add quality stocks for long-term investment
We prefer the last action and believe that recent selldown provides an excellent opportunity for long-term investors. Few REITs are shortlisted, and we would add them to our portfolio once the situation starts to stabilise. More updates will be available in the next monthly newsletter.