During times when there are impending interest rate hikes, the property counters almost always respond with a downward trend. We all know that it is a no-brainer response. In the last few months, we have also been bombarded with pockets of news that there will be three interest rate hikes in the year alone. Certainly, the local interest rates, Swap offer Rate (SOR) and Singapore Interbank Offered Rate (SIBOR) that track the US interest rates will also follow suit. Given that they are the benchmark rates for housing and business loans, it is only a matter of time that the local interest rates will rise as well. Of course, a rising interest rate would not be good for property related companies. But recently, it appeared that the stock prices of many developer property counters were making at least their 12-months high.
Just look at the chart of the several developers. City development share price closed at $9.48 today, but for the whole of 2016, the share price had been less than $9 per share. As its worst, it was even below $7.00 per share. Similarly, the share price of Capitaland ended today at $3.65, but for the whole of 2016 and even into the last quarter of 2015, the share price did not even pass $3.20. Only on some isolated occasions, the share price went above $3.20 momentarily, but only to drop back below $3.20. In fact, during this period of 15 months or so, it had been so range-bound that one could have made some trading gains by buying below $3.00 and selling at $3.20 earning about 8% to 10% in the process. Same story goes to OUE, it had been staying below $1.80 for the whole of 2016. Today, it ended at $1.96 per share.
Now the question is why are share prices of these counters defying gravity in spite of the fact that there would be likely three interest rate hikes. First, of course, the market tends to react very quickly, often without rationality, to market news – Sell first, then talk later. The news about interest rate hikes is not new. It was conceived as early as in May 2013 when the previous FED chair, Mr Ben Bernanke, first spoken about it although there wasn’t much conviction at that time. For nearly four years, there were a few scares, but in reality, there were only two hikes. But that was good enough to suppress the property stock prices as it was always uncertain when the next interest rate hike would come. While the downward trend remains relatively orderly, nobody wants to buy them for fear of being caught on the wrong side of the curve. Perhaps, it is a matter of undershoot, as mentioned in my book. The general pessimism was further depressed with the local long-drawn property curbs.
However, the recent financial results of these companies seemed to change all that. The generally good results suggested that the situation was probably not as bad as anticipated. Well, as we know, aircraft do not crash on ground. The market started to realize that their 2016 performance justify a higher valuation after all. It is one of the situations that the market can sometimes be very wrong for a long time. But does that mean that share price will continue to be at this level? Well, not quite. As the days draw nearer to a hike, there is a good chance that there will again be a fall in the stock price in anticipation of the hike. That’s why stock prices movement can never be in a straight line. Today’s slight fall may be the beginning of that as there are no more uncertainties from now till the nearest interest rate hike. Meanwhile, enjoy the rising tide.
Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.