Many investors were caught off-guard by the rapid rise in interest rates over the past two years.
From 2022 to 2023, the US Federal Reserve hiked interest rates by 4.88 percentage points, its fastest pace since any other time in history.
The good news is that interest rates could be heading lower as the latest labour market report in the US showed that unemployment hit 4.3%, the highest since October 2021.
With stock markets in turmoil over fears of a recession, the US central bank is under pressure to slash interest rates to prop up the economy.
Here are four companies that stand to benefit should interest rates head down in the coming months.
PropNex Ltd (SGX: OYY)
PropNex is an integrated real estate services group offering real estate brokerage, training, and consultancy.
The group has 12,233 sales professionals in its team as of 15 February 2024.
With the business tied closely to the property sector in Singapore and the region, interest rates will naturally have a big bearing on the company’s fortunes.
Higher interest rates result in higher overall mortgage rates which will dampen property purchases and lower transaction volumes.
A case in point can be found in PropNex’s 2023 financial report.
Revenue fell by 18.6% year on year to S$838.1 million as buying sentiment and transaction volumes cooled amid property cooling measures and elevated interest rates.
The group saw its net profit tumble by 23.3% year on year to S$47.8 million.
Despite the fall in profit, the real estate player managed to generate a positive free cash flow of S$57.5 million.
PropNex paid out a final dividend of S$0.035.
Coupled with the interim dividend of S$0.025, 2023’s total dividend came up to S$0.06.
Should interest rates head lower, it could revitalise the property market and lead to higher transaction volumes, thus boosting PropNex’s top and bottom lines.
City Developments Limited (SGX: C07)
City Developments Limited, or CDL, is a blue-chip real estate company with a network spanning 163 locations in 29 countries and regions.
The group’s diverse portfolio spans different property sub-classes such as residential, commercial, retail, serviced apartments, and student accommodation.
CDL’s development arm should benefit from lower interest rates as more people will be attracted to purchase its newly-developed properties.
Lower rates should also spur a higher volume of property transactions and lower financing costs for the group to purchase more land to refill its and bank.
For the first quarter of 2024 (1Q 2024), CDL and its associates sold 429 units of Singapore residential property and generated sales revenue of S$736.8 million.
The group plans to launch two new projects in the second half of 2024 – Union Square Residences (Central Mall area) and Champions Way (Woodlands).
Lower interest rates should spur more people to commit to stay-in or investment property purchases, thus boosting CDL’s Singapore residential development division.
The Hour Glass (SGX: AGS)
The Hour Glass, or THG, is a luxury watch retailer with more than 50 boutiques in 13 cities across the Asia-Pacific region.
The group is the official retailer for watch brands such as Rolex, Patek Philippe, Cartier, Omega, and Panerai.
As luxury watches are discretionary purchases, lower interest rates can help to generate higher demand for such purchases as people will have more disposable income.
The group reported a mixed set of earnings for its fiscal 2024 (FY2024) ending 31 March 2024.
Revenue inched up 1% year on year to S$1.1 billion but net profit fell by 9% year on year to S$156.5 million because of higher expenses.
The luxury retailer managed to generate a healthy positive free cash flow of S$117.6 million for FY2024.
THG declared and paid out a final dividend of S$0.06, taking FY2024’s total dividend to S$0.08, unchanged from a year ago.
Group managing director Michael Tay commented that the luxury watch market is “finding a new equilibrium” which he believes will be beneficial for the long-term sustainability of the sector.
Taka Jewellery (SGX: 42L)
Taka Jewellery sells an extensive range of jewellery items along with gold and has 18 outlets around Singapore.
The demand for luxury items should increase with the lowering of interest rates as it puts more disposable income in the hands of consumers.
Consumer sentiment will also improve should rates head lower as people will spend less money on servicing their debts.
Taka Jewellery reported a downbeat set of earnings for the first half of its fiscal 2024 (1H FY2024) ending 31 December 2023.
Revenue slid 2% year on year to S$70.6 million while gross profit declined by 4% year on year to S$20.3 million.
Net profit tumbled by 12% year on year to S$5.4 million.
The group is planning for a strategic expansion and is targeting a gradual increase in the number of jewellery outlets and pawnshop outlets.
This move should help to cement and strengthen its brand position while increasing its competitiveness in a crowded marketplace.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
