Newsletter

October 2019 Newsletter

Performance

The month of October typically showed the volatility that has come to characterise global markets with President Trump of the U.S. re-evaluating the possibility of a trade deal. Nonetheless, he announced that a ‘phase one’ portion of the trade war resolution would occur. Global markets in turn returned the favour as we saw global markets run up. To add to the relief, American companies that have been announcing results have been beating expectations, much to the fanfare of the market with 78% of all companies reporting beating estimates. Even though the Federal Reserve decided to hold rates, the market went ahead with a ‘risk-on’ rally. The portfolio for the month of October was up by 2.83% and beat the South African Listed Property index at 1.80% and the All Property index at 2.80%.

Gold rallied well into the month and oil came off its highs caused by the bombing of the Saudi Arabian oil fields. Saudi Arabia continued with its intentions of listing Aramco, the Saudi state oil company whom the crown prince at one point valued it at $1.5 to $2 trillion, making it one the biggest listings on global markets, ever. Even though as we feel that Saudi Arabia has come late to the party in trying to diversify away from crude oil as an economy (such as United Arab Emirates and Norway), it’s never too late. African countries have yet to begin the process as future estimates of oil don’t see the price going back above $100’per barrel, which will impact their economies.

 

Going back to the West, Britain provided more certainty with parliament approving the Brexit deal that Prime Minister Boris Johnson presented and going ahead with the general election, set to happen on December 12, 2019. The European Union also approved the further delay of Brexit, allowing for general elections. The Pound strengthened against all currencies by approximately 2 %, which sent UK Listed property companies higher. More importantly, we believe that Brexit may provide an opportunity for foreign investors to buy great assets in a great location at cheap valuations due to the uncertainty of Brexit. As investors, for us to achieve greater returns, we as MSM Property Fund had decided to change the benchmark so as to allow for larger allocation to offshore companies. This will allow for further diversification for the portfolio across global markets.

Benchmark Change (Click here)

The changing of the benchmark for our unit trust is important in that it gives the portfolio the ability to seek returns in other geographies outside of South Africa. We still believe in the investment case for South Africa yet we believe the turnaround of the economy will take longer. Hence, we would want the ability to have access to other regions where growth is more prevalent. Also, following the collapse of the listed property sector in 2018, driven by the Resilient Stable of companies which at the time constituted 40% of the South African Listed Property Index, this revealed the concentration risk of a handful of companies on the performance of the index thereby not being an accurate and representative index of the sector. Therefore, the change to the All Property Index was instituted. The letter written to clients goes deeper into the explanation regarding the decision made.

 

The Collapse of WeWork Listing
In August, we reported on the rise of WeWork, a nearly $47bn valued company on the verge of listing that was seen as a rising unicorn company that seemed destined for success which would redefine the experience of everyday work and commercial real estate. But as more information became apparent due to listing requirements destined for the month of October, more corporate governance issues were raised by the potential investors and more scandals came out regarding the behaviors of the then CEO Adam Neumann. The outcry eventually led to the resignation of the Adam Neumann as CEO, the suspending of the listing and the saving o the company as it had been burning through cash due to the high intensity of development. The meteoric rise of WeWork has come to characterize the tech boom of our era. But what has changed from the previous period is societies appetite regarding how a company and its leadership conduct themselves, specifically in this case, corporate governance.

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