Morningstar Equity Report: US Economy And Singapore REITs Earnings

Interest Rates: Although the Federal Reserve is still hiking interest rates, for now, Morningstar Equity expects the U.S. Federal Reserve to pivot to easing monetary policy in 2023 as inflation falls back to its 2% target and the need to shore up economic growth becomes paramount. We’re expecting interest rates to fall much more than consensus in the near term, with our projected year-end 2023 federal-funds rate at 1.75% compared with 3.25% for consensus. Likewise, near-term Treasury yields are too high—implying a much tighter monetary policy than we’re expecting.

Inflation: The rating agency is projecting price pressures to swing from inflationary to deflationary by 2023, owing greatly to the unwinding of price spikes caused by supply constraints in durables, energy, and other areas.

GDP and Recession Risk: For now, the Fed is slowing the economy enough to help cool off inflation without provoking a major slowdown. Morningstar is projecting annual growth rates to remain in positive territory. A technical recession is a possibility, but we don’t think it would be a quantitatively significant slowdown.

  • Suntec REIT’s Q2 2022 in Line; Recovery on Track; Trading at an Attractive Forward Yield of 6.0% – Xavier Lee, Equity Analyst

Although it is expected some upward pressure on yields due to the rising interest rate environment, Morningstar has already factored in a 50-basis-point and 100-basis-point yield expansion on the exit cap rate for Suntec REIT’s office and retail assets, respectively. Based on the current price, Suntec REIT trades at a forward yield of 6.0%, which is believed to be an attractive spread to the Singapore 10-Year Government Bond Yield of 2.7%.

  • Frasers Centrepoint Trust’s Fiscal Q3 Business Update In Line; Rising Interest Rates Weigh on FVE – Xavier Lee, Equity Analyst

Narrow-moat Frasers Centrepoint Trust’s, or FCT’s, third-quarter fiscal 2022 (year ends September) results were largely in line with our expectations. Morningstar raises the exit cap rate used to compute the terminal value of FCT’s suburban malls and office property on the back of the more aggressive U.S. federal-funds rate hikes to combat inflation. Hence, the firm is lowering the fair value estimate to SGD 2.58 from SGD 2.74.

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