This week, for the first time in four years, the US Federal Reserve cut its key lending rate by 50 basis points (0.5%), bringing it down to a range of 4.75% to 5%.
Previously, the Fed had aggressively raised rates from near zero to a multi-decade high of 5.25% to 5.5% between March 2022 and July 2023, largely in response to soaring inflation driven by the Covid-19 pandemic. Now, with inflation largely under control, the Fed has shifted its monetary stance, choosing to lower rates. This move reduces borrowing costs for consumers and businesses, stimulates economic activity, and often boosts stock markets by lowering the cost of capital.
Global stock markets responded favourably to the rate cut, with the S&P 500 and Dow Jones Industrial Average closing at record highs on Thursday morning, Singapore time. In Singapore, the Straits Times Index (STI) reached its highest level since 2007, climbing to 3,633 points on 19 September.
Looking ahead, the Fed projects its benchmark rate will drop by another 0.5 percentage points by the end of this year, a full percentage point in 2025, and an additional 0.5 percentage points in 2026, settling in the 2.75% to 3% range.
With this as a backdrop, let’s explore four sectors poised to benefit from this significant US Fed rate cut and any future declines in interest rates.
Real Estate Investment Trusts (REITs) Seeing Some Respite
REITs often benefit from falling interest rates because they depend heavily on borrowing to finance property acquisitions. As borrowing costs decrease, REITs can refinance their existing debt at lower rates, improving their profitability and increasing the funds available for distribution to investors.
In addition, lower interest rates can boost economic activity, which may drive up demand for rental properties. REITs focused on retail, office, and industrial properties will likely attract more investor interest. In Singapore, examples of REITs that stand to benefit include Mapletree Pan Asia Commercial Trust (SGX: N2IU), CapitaLand Integrated Commercial Trust (SGX: C38U), and Keppel DC REIT (SGX: AJBU).
As of this writing, the iEdge S-REIT Index, considered the benchmark for Singapore’s REITs, reached a one-year high of 1,142 points and may continue to rise. Given that real estate is a safe-haven asset, REITs are expected to remain a popular choice for investors seeking yield and stability.
Read Also: REITs Report Card 2024: How Singapore REITs Performed In 1st Half 2024
Demand Boosting Property Developers
Lower interest rates make property purchases more attractive for homeowners and investors by reducing mortgage rates. This creates an opportunity for property developers to increase sales and launch new projects.
Additionally, the reduced cost of financing new developments enables developers to improve profit margins, making the sector more appealing to investors. Examples of Singapore-listed property developers that stand to benefit include City Developments Limited (SGX: C09) and UOL Group (SGX: U14).
Given Singapore’s limited land supply and strong demand for property, the sector remains resilient and is well-positioned to grow in a lower interest rate environment.
Read Also: 5 Ways Singapore Investors Can Invest In Properties (Without Buying A Physical Property Yourself)
Banking On Banks
While local banks may experience a decline in net interest margin (NIM) due to lower interest rates, they stand to benefit from other factors. NIM, a key measure of bank profitability, is calculated by subtracting the interest a bank pays creditors from the interest it earns on loans.
A rate cut often boosts consumer borrowing, driving up loan, mortgage, and credit card spending demand. Singapore’s major banks – DBS (SGX: D05), UOB (SGX: U11), and OCBC (SGX: O39) – have strong balance sheets, which help them remain stable through different economic cycles.
Historically, these banks have thrived during periods of low interest rates, supported by robust loan growth and fee-based income from services like wealth management. DBS, OCBC, and UOB will likely remain attractive to income-seeking investors as interest rates decline. Their consistent dividend payouts and solid financial health make them appealing alternatives to bonds and other fixed-income securities.
As long as Singapore’s economy remains strong, these banks are expected to continue increasing their dividends, providing shareholders with a reliable source of income.
Read Also: DBS (D05); UOB (U11); OCBC (O39): Singapore Banks Dividend Yield And Share Price Performance
Consumer Goods & Services Sector Poised to Benefit
Lower interest rates often boost consumer spending as people feel more confident about borrowing and spending.
Sectors such as luxury retail, tourism, and supermarkets can expect increased footfall and higher consumer demand as borrowing becomes cheaper and consumer sentiment improves.
With tourism recovering, especially post-pandemic, Singapore’s consumer-facing sectors are well-positioned to capitalise on this economic tailwind.
Here are some examples of Singapore-listed companies that could benefit:
The Hour Glass Ltd (SGX: AGS) and Cortina Holdings (SGX: C41): These two companies are heavyweights in the luxury watch retail market. With lower interest rates, consumer sentiment will likely improve, benefitting the watch purveyors.
Sheng Siong (SGX: OV8) and DFI Retail (SGX: D01): Singapore’s largest supermarket chains, Sheng Siong and DFI, can expect heightened demand as consumer confidence rises, particularly for their range of everyday goods. Homegrown supermarket chain Sheng Siong has 71 outlets located across Singapore’s residential heartlands, while DFI owns popular supermarket brands such as Cold Storage and Giant.
SIA (SGX: C6L) and SATS (SGX: S58): Singapore’s flag carrier, Singapore Airlines (SIA) and provider of food solutions and gateway services, SATS, are likely beneficiaries of a resurgence in air travel and tourism, supported by possible increased consumer spending from the rate cut.
The US Federal Reserve’s recent rate cut marks a significant change in global monetary policy, creating ripple effects across economies worldwide.
In Singapore, sectors such as REITs, property development, banking, and consumer goods and services benefit from this shift.
By carefully analysing how these sectors respond to lower interest rates and conducting thorough due diligence on individual stocks, investors can position their portfolios to capture potential opportunities.
The post 4 Sectors In Singapore That Will Benefit The Most From The US Fed Rate Cut appeared first on DollarsAndSense.sg.
