Interest rate hike threat dampens telcos' appeal

In spite of their stable guidance for 2015.

Singapore-listed telcos are prized as defensive stocks, but the looming interest rate hike could put a dent in the telcos' armor.

OCBC Investment Research cautions that while all three telcos guided for a stable outlook in 2015, the end of low interest rates could spell trouble for these stocks.

"With telecom stocks being pitched as defensive stocks and “prized” for their stable and attractive dividend yields, the threat of higher interest rate is likely to be a concern," stated OCBC.

OCBC also noted that that the SGS bond yields have risen to reflect the market’s view of a US rate hike. 1-year bond yields have risen back to 0.86% from just 0.3% in Sep 2014; 10-year bond yields have also jumped to 2.3% from just 1.8% at the start of the year.

In spite of this, M1 and Singtel have both strongly outperformed the STI over the past one year, while StarHub has lagged not only its peers but also the index.

"As the US economy continues to improve, the odds have increased for the Federal Reserve (Fed) to raise interest rates by early as mid-2015, versus towards the later part of 2015. We believe that as long as local interest rates do not rise sharply, we do not expect the telcos to lose their appeal," stated OCBC.

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