JPMorgan-Hong Kong Property Will the sector outperform with rate cut-109216931.pdf

AsiaPacificEquityResearch14July2024JPMORGANwww.jpmorganmarkets.comChinaPropertyKarlChanAC(852)2800-8513karl.chan@jpmorgan.comVenusChoi(852)2800-8599venus.choi@jpmorgan.comJocelynGao(852)2800-8529jocelyn.gao@jpmorgan.comJ.P.MorganSecurities(AsiaPacific)Limited/J.P.MorganBroking(HongKong)LimitedOverthelasttwotradingdays,thesectorsurged8%(HSI:+5%)duetorisingexpectationsonanearlierratecut.Whileanear-termoutperformanceispossible,wethinkratecutalonemaynotdriveasustainablerally,becausesectorfundamentalsareyettoseeaturnaround(e.g.highinventoryinresidential,currencyheadwindinretail,weakdemandinoffice).Inthefollowinghistoricalsharepriceanalysisagainst(1)UStreasuryyield;(2)USinterestrate;(3)HIBOR,keyconclusionsare:(1)sharepricesusuallyturnedevenweakerduringaratecutcycle(Table6HKProperty–sharepriceperformancethroughoutadowncycleinUSinterestrate);(2)Ashort-termoutperformanceispossibleshortlybeforethefirstratecut(i.e.themarketonlytradedonexpectationsforashortterm)(Table8HKProperty–sharepriceperformance1monthbeforethefirstcutinUSinterestrate);(3)throughoutadowncycleoftreasuryyield,HKPropertyasawholedidnotparticularlyoutperform(Table3HKProperty–SharepriceperformanceamidadowncycleinUStreasuryyield),exceptLinkREITandHendersonLandwhichwerehistoricaillythemostsensitive(average6-14%outperformance).Thesameoutperformancewasobservedin4Q23too(Figure1SharepriceperformanceduringadropinUS10-yeartreasuryyieldin4Q23).Currently,theyieldofLinkREITandHendersonLandisstillattractiveat8.0%and7.7%respectively.Forpairtrades,wecontinuetorecommendlongLinkREIT&shortWharfREIC.•Background:J.P.Morgan’sJayBarrynowforecaststhefirstFedeaseinSeptember(vs.Novemberpreviously)withaquarterlypaceofcutsthereafter.Hislatestforecastforthe10-yeartreasuryyieldis3.90%by30June2025(fullnote).•Notallnamesaresensitivetoalowertreasuryyield:Historically,throughoutadowncycleintreasuryyield,HKpropertynamesdidnotparticularlyoutperform,exceptLinkREIT(+14%),whichhastraditionallybeenpositionedasayieldplay(Table3HKProperty–SharepriceperformanceamidadowncycleinUStreasuryyield).Ifwejustfocusonthefirstmonthafterbondyieldstartedtocomedownfrompeak,therewasnoparticularoutperformanceeither(Table4HKProperty–Sharepriceperformance1monthafterUStreasuryyieldstartedtofallfrompeak).Ifwetakereferenceto4Q23duringwhichbondyielddroppedfrom4.99%to3.79%,LinkREIT(+29%)sawthebiggestoutperformance,followedbyHendersonLand(+19%).However,nameswithcompany-specificissuesstillunderperformed,e.g.NWD(-2%)andWharfREIC(-9%)(Figure1SharepriceperformanceduringadropinUS10-yeartreasuryyieldin4Q23).Ifwelookattheaveragereturninthepast10downcyclesintreasuryyield,wealsoobservesimilarresults(Table1HongKongProperty-sharepriceperformanceduringadowncycleinUS10-yeartreasurybondyield(bycompany)-absolute).•Ratecutexpectationdroveshort-termrally,butHKPropertyusuallyunderperformedduringaratecutcycle:Historically,whiletheUSinterestratedroppedfromthepeaktothebottom,HKPropertyunderperformedby17-19%onaverage(Table6HKProperty–sharepriceperformancethroughoutadowncycleinUS