Singapore’s government intervention, rising interest rates likely to derail market improvement after a challenging period: OCBC Credit Research

Following a fast start to 2018, credit markets turned increasingly bearish through 1H2018 as yield curves steepened from constructive US economic prints and rising inflation and the US Federal Reserve upgraded its median dot plot from 3 rate hikes this year to 4, according to the latest report from OCBC Credit Research.

At the same time, geopolitical concerns (including trade tensions) and signs of moderating economic growth (with rising Chinese rising defaults) led to rates volatility, prevailing risk off sentiments and a generally cautious market tone.

These factors, together with prevailing tight valuations, contributed to a credit market correction with the subsequent re-pricing of primary issues and secondary curves leading to bid-ask spreads increasingly widening and issuance volumes dropping sharply.

As market liquidity recedes, our attention has turned from absolute levels of leverage to issuers’ ability to pay short term financial commitments when they come due.

With the above in play, our themes from the Singapore Credit Outlook 2018 still hold. We advocate that investors remain selective and focus on names higher up the credit curve that have moderately leveraged balance sheets, sufficient scale and (more importantly) adequate liquidity. This should provide a buffer against tighter funding conditions and a rising rate environment as well as mitigate potential ongoing market volatility.

Recent results for Financial Institutions have been broadly supportive, with stable to growing loan volumes and improving loan quality indicators. Rising interest rates should be positive for top lines but the impact on earnings and capital ratios depends on where banks are in their restructuring processes which are ongoing.

The prior period lackluster performance of office REITs is expected to give way to improved operating conditions for the remainder of 2018. However, the same may not apply to retail REITs with downcast business confidence in the retail sector despite Singapore’s recent strong economic performance.

"Although industrial property prices and rental rates were down q/q, the declines have decelerated. We are encouraged that the market looks to be slowly improving after a challenging period. We expect an increasingly dual-track market in Singapore with higher specification properties attracting significant bidding interest while Industrial REITs intensify the selling of lower potential properties to a smaller pool of buyers," the report added.

Despite the recent cooling measures, Singapore property prices may continue to rise, albeit at a slower pace, through 2H2018 due to displaced homeowners from enblocs looking for replacement homes while supply has yet to fully come on stream.