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Growing signs of correction or pause in uptrend of Reits sector

OVER the last five months, the FTSE ST Real Estate Investment Trust Index (FSTAS8670), an index for the Singapore Reits sector, soared over 14 per cent, significantly outperforming the Straits Times Index.

The rally, fuelled by the current dovish interest rate environment, has led the index back to all-time highs since its peak back in early 2018. However, due to recent developments, there are growing signs of a possible correction or pause in the uptrend. This gives investors reason to approach the sector from more of a perspective of safety.

What happened?

In recent news, CWT Pte Ltd, a major tenant of AIMS APAC REIT, Cache Logistics Trust, and Mapletree Logistics Trust, drew much interest as its parent company failed to make timely payments to creditors.

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This left investors concerned over whether CWT Pte Ltd would also experience difficulty paying its rental obligations to its lessor Reits. Despite the management from all three Reits giving assurance that CWT had not defaulted on its rental payments and that of the Reits currently hold security deposits of three to six months of rental, all three Reit share prices fell on the news, recovering slightly afterwards.

Technical analysis

Looking at the FTSE ST Reit index, signs of a reversal are showing as a result of the fall. The index closed below its 20-day simple moving average, with confirmation of a small double top reversal pattern. What also looks worrying is the MACD indicator showing a bearish divergence signal of higher highs on the FTSE ST Reit index, but lower highs on the indicator, a rare but often powerful reversal prediction.

The reality of a reversal is not confirmed as we have yet to see lower highs and lower lows and declining moving averages. However, it is a difficult time for investors seeking a bargain as prices and Reit sector valuations are near historical highs and yield spreads near historical lows. Tread the sector in view of a possible correction or consolidation nearing.

Bullish scenario

We could see a resumption of the uptrend if market sentiment is strong. Before resuming its upward move, prices could first find support around the 850 level at the 50 exponential moving average and 78.6 per cent Fibonacci retracement level.

Alternatively, prices could enter a consolidation phase, which could see range-bound movements within the 850 and 870 levels.

Bearish scenario

If a correction occurs, prices could hold at the nearest support area of the 850 level, before trading down to the 830 level at the 61.8 per cent Fibonacci retracement level if bearish and risk adverse sentiments hold true.

  • The writer is senior equity specialist at PhillipCapital.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.