Tightening monetary policy by Fed a test for Singaporeâs Reits, market revitalisation project

[SINGAPORE] When the US Federal Reserve was hiking rates at a frenetic pace in 2022 in response to the post-pandemic surge in inflation, this column warned that investors should brace themselves for a broad market sell-off.

The impact of that round of global monetary policy tightening was much more shallow and short-lived than I had expected, though. Much of the upward pressure on prices at the time had been caused by supply chain bottlenecks in the wake of the pandemic, which soon eased.

As a result, inflation quickly abated while economic activity stayed resilient. By 2023, many investors were anticipating that the Fed would pause its rate hikes and eventually begin cutting – which it did in late 2024.

Investors holding a portfolio of stocks represented by the Straits Times Index (STI) would not have suffered much downside over that period. The benchmark index achieved a total return of 8.4 per cent in 2022, and 4.7 per cent in 2023.

The following year, the STI began galloping – driven by softer interest rates, elevated profitability at the banks, value unlocking moves by some companies, and the big initiatives to revitalise the Singapore market. The STI chalked up a total return of 23.5 per cent in 2024, and 28.8 per cent in 2025.

So far this year, the STI has returned 26 per cent.

Will the 25-basis-point rate hike announced by the Fed last week – its first rate increase since 2023 – have a similarly benign impact on the STI? How should investors reposition themselves in the Singapore market this time around?

Prepare for more persistent inflation

The inflationary pressures that the Fed and other major central banks are now addressing seem much less severe than in 2022. In fact, Fed chairman Kevin Warsh said last week’s rate hike simply “removed a dose of accommodation” at a time of strong economic growth, in order to “support a timelier return” to its goal of 2 per cent inflation.

He went on to say, in response to questions from reporters: “I don’t believe we need to do harm to the labour markets to achieve our objective. I don’t believe the two parts of our mandate – price stability and full employment – are working at cross purposes over the medium term.”

Yet, it may take a sustained tightening of monetary policy to ensure that inflation expectations do not become unmoored amid currently volatile energy and food prices. Indeed, central banks in Europe, Japan and Singapore have tightened monetary policy more than once this year.

The median projection of participants at last week’s Fed meeting was for inflation (based on the personal consumption expenditure index) to end 2026 at 3.7 per cent, up from 3.6 per cent at the June meeting.

Their median projection for the mid-point of the target range of the federal funds rate at end 2026 was 4.1 per cent, up from 3.8 per cent at the June meeting. This suggests one further 25-basis-point rate hike before the end of the year.

Meanwhile, long-term bond yields have been trending higher in recent months. The 10-year US Treasury bond yield briefly fell after the Fed’s rate hike last week, before climbing back above 5 per cent.

Unless there is some geopolitical event that tames energy prices, or a global economic slowdown that drives up unemployment and curtails investment spending, it seems unlikely to me that concerns about inflation will abate as quickly as they did back in 2022 and 2023.

Against this backdrop, it would probably make sense for investors to adopt a defensive posture, and focus on high-quality companies, with strong balance sheets, visible revenue and earnings drivers, trading at reasonable valuations, in my view.

Narrower returns after broad re-rating

The impact of renewed monetary policy tightening is already evident in the Singapore market. While the STI has delivered a total return of 26 per cent so far this year, the gains have been narrow.

For instance, only six of the STI’s constituents outperformed the benchmark index during the period. They included its two biggest constituents, OCBC and DBS, which returned 65.5 per cent and 41.7 per cent, respectively.

UOB trailed the index slightly, with a total return of 24.1 per cent.

Reflecting the expectation that interest rates could stay higher for longer, only two of the eight real estate investment trusts (Reits) within the STI were in positive territory – just barely. They were Keppel DC Reit and CapitaLand Integrated Commercial Trust, with total returns of 1.35 per cent and 0.1 per cent, respectively.

Of the STI’s 30 constituents, 18 achieved a positive total return during the period.

By contrast, all but one of the STI’s components were in the green last year. Twelve of them outperformed the index’s total return of 28.8 per cent.

Interestingly, only one of the banks was among those outperformers – DBS, with a total return of 36.9 per cent. OCBC and UOB returned 25.6 per cent and 2.9 per cent, respectively.

The seemingly broader investor interest in the Singapore market last year was also evident in the performance of the iEdge Singapore Next 50 Index (N50). In 2025, this midcap index returned 26.7 per cent, with 41 of its 50 constituents in the green.

Since the beginning of this year, the N50 has returned only 2.9 per cent, with 26 of its 50 constituents achieving a positive return.

Why were the gains across the Singapore market so much wider last year? In my view, this was at least partly due to the Equities Market Review Group announcing various measures to revitalise the market.

A number of prominent companies also took bold steps to unlock value and reposition their businesses, which further accentuated the re-rating of the whole market. Among these companies were DFI Retail Group (total return of 103 per cent in 2025), Hongkong Land (63.9 per cent), Keppel (58.5 per cent), and Singtel (54.1 per cent).

Some analysts turning cautious

Looking ahead, higher interest rates could help DBS, OCBC and UOB sustain their elevated profitability into 2027.

Yet, after their very strong gains over the past couple of years, and with the growing risks to macroeconomic conditions posed by the Middle East conflict, some analysts have downgraded their recommendations on these heavyweight stocks, and cut their targets for the STI.

Should investors rotate into more attractively priced, smaller cap stocks? Or should they get out of the Singapore market altogether?

My own inclination is to do both. While there are many interesting smaller cap stocks in the local market riding big global currents, I am not sure I would be comfortable having as large an exposure to them as the big market anchors such as DBS, OCBC or UOB – especially in light of an increasingly uncertain outlook for the global economy.

Indeed, Singapore’s market revitalisation project could face a crucial test as interest rates and bond yields rise in the months ahead. With increased competition for capital, companies pursuing value unlocking initiatives will probably face more scrutiny and scepticism.

Coherent corporate strategies, disciplined execution and proactive market engagement will become increasingly important in garnering the attention of investors and higher market valuations.