The SRS Fund Jul 2024 Update

Will Banks and REITs Swap Fortune?

There was much focus on the Banks and REITs sector and how their fortune had diverged since the unprecedented pace of interest rate increase by the US Federal Reserves to curb high inflationary pressure.  

Fast forward 28 months later, we find ourselves finally at the inflection point of the rate curve.  The long-awaited rate cut is all but sealed during the early days of Aug as weak economic numbers suggest the US economy is quickly losing steam.  The looming recession forecast causes the market to tank likely starting a meaningful pullback from the raging bull market.

Closer to home in Singapore.  The STI index crashes on opening led by banking stocks.  The looming interest rate cuts strike fears into bank investors predicting a squeeze in interest margins.  

Very often Alpha (the outperforms relative to the market) is created when the investor bets against the market which turns out to be right.  I believe the chance has presented itself for Singapore Banks stocks.

The ability of local banks to maintain their 2% margin has a high probability. This is because there is so much room to cut interest rates to allow for such a margin.  Suppose we have a 2% cut in the next 24 months.  Banks can easily pay depositors 2% less and that will still leave local savers with a saving rate of over 1%.  This may cause savers to shift cash towards wealth management products further increasing banks’ profitability.  

On the lending side.  Banks can lend comfortably at just over 3% thus maintaining their net interest margin.  With interest rate at the 3% level, I foresee a very high demand for loans thus improving the loan books.  Property owners and businesses will rejoice in lowering their costs which will allow the improvement of investment and consumption.  So no I say the stock market is wrong about banks and the SRS Fund will put money where our mouth is by buying and holding more bank stocks.

The long-term prospects of REITs however are a different story.  The REIT model was built based on a long and extended extremely low interest rate environment after the financial crisis.  It has a structural issue which is under-capitalisation in this “new” era of normal interest rate.  REITs will take many years to find equilibrium and adjust unless the world goes back to ultra-low interest again.  

Every year there is always one to two months that define the outcome of one portfolio and July seems to be the month for the SRS Fund. The SRS Fund ended up in record territory surpassing the $400k mark for the first time in its history. This however comes on the back of a subpar performance to the index which surged 7.5% year to date.

Events in Aug may however allow the SRS Fund to take the lead again with some lucky trimming of shares before the early August crash which we will cover the following month.

Portfolio Segments

There was no turnover for the SRS Fund during July and hence segment changes are organic in nature as the finance sector took the lead to ahead to more than half of the SRS Fund.

Dividends

Record dividends were announced during this earnings season with most payout to be handed out in Aug and Sep period. It is safe to say the dividend in Q3 will again surpass the same period last year.

SRS Fund Value

The $400,000 mark has been hit since the SRS Fund started some 13 years ago. While the SRS Fund is projected to reach the 7-digit mark in its lifetime, it is still a wonder to marvel at this compounding effect taking place.

Cash Levels

With some luck in the timing of the sale of Keppel Corp shares due to its horrible result, the SRS Fund surprisingly found itself in an enviable position of having 10% cash to pick some really good bargains during this Aug downturn. Chart however may not tell any of this story as positions may have shifted in the course of the month.

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