Newsletter

MSM Property Monthly: Half Year report-Up 20%😃

DEAR INVESTOR,

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Highlights:​​

  • Listed Property up 20%
  • General Equities up 14.5%
  • Asset Under Management breach R500m

Performance

We’re officially past the midway point of the year and how time flies by, especially in these challenging and trying times. Without your support and growing base, we would not have surpassed the R500m threshold which is an important milestone in our growth as a specialized asset manager and private equity firm. We still have a long way to go but its important to celebrate the wins and with the events of the past month and the ongoing global Covid -19 crisis, one must always appreciate the good aspects of life.

Nonetheless, June saw the fund close out the half year being up 19.85% vs benchmark which was up 20% for the year, as we took profits to protect the precious gains, we had garnered during the first half of the year. We took the foot off the pedal, so to speak, so as to reassess the ever-changing world we live in and the major macro-occurrences for the portfolio, specifically because of inflation concerns which will be highlighted later. For our Equity portfolio, we were up 14.5% for the first 6 months beating benchmark (13.8%) and coming second after the listed property asset class (20.00%). Table 1 depicts the comparison between the different asset classes and the listed property and general equity performances of MSM. Even amongst the noise, we’ve been able to deliver performance for our most important clients, you!

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For the outlook regarding portfolio returns, equity prices will be supported by the collective stimulus being maintained by central banks along with low interest rates. We see listed property gaining another 5%-10% by the end of 2021 and we see general equities up another 5%, with resources being the main lead for the JSE.

We believe risk assets will benefit from the glut of money in the financial system as the Fed and other central banks allow for inflation to go past their stipulated mandates. We note that many investors and many retail investors have “missed-out’’ on the buying opportunity of a decade and hence will start buying the dips that present themselves in the market. This will be supported by the continued reopening of global economies as governments across the world go ahead with re-opening regardless of what variant may be dominant as livelihoods take precedent.

When looking at our predictions for the year 2021, here is our report card on how we have fared so far:

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There’s still a lot to play out yet we believe the recovery, yet we underestimated the inflation effect and how much of a factor it would play in the returns.

Global Market Themes

The American economy released good manufacturing data showing the continued recovery from the world’s largest economy. Jobs data came out positively with 556K jobs being created and we saw the unemployment rate drop down to 5.8%, from 6.1% the previous month. However, the economy is seeing supply constraints regarding the filling of jobs. The reopening of the economy with the creating of jobs has added onto transitory inflation which had become a major worry for the markets in the second quarter. The Federal Reserve had noted the increased inflation and would allow for it to go beyond its target of 2%. Interest rate hikes will only be hiked in 2022 and 2023 as the Federal Reserve still sees the inflation as transitory. The inflation is based on the reopening of the economy and constraints to supply chain disruptions rather than too much money in the system due to injection of cash within the economy. Hence the reflation trade will be allowed to carry on for the rest of this year. This will be good for equities and we expect to see more funds come into the market as the Federal Reserve has given the go ahead on the inflation worry, which dominated returns for the second quarter of this year. Inflation is expected to breach 2% and oil will add onto this as the commodity passes $70 per barrel as the Saudi’s in OPEC maintain control of the production of oil barrels for the world.

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The European Central Bank has followed the lead of the Federal Reserve in the US with a delayed move on inflation as they also believe that inflation is only transitory. The European Central Bank has maintained its inflation of 2% as the Eurozone area sees a stable but fragile economic recovery (see table of central bank responses globally). Retail sales for the area beat expectations as business confidence along with purchase managers index beat expectations. The roll out of the vaccinations continues and the Eurozone approved vaccine passports. Of concern has been the UK’s infection rates which have begun to rise sharply as the Delta variant has spread, even with high vaccination rates.

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Unlike the UK, China has seen slight increases in infection rates and the government has to curbed the spread by acting quickly. The same tight grip was also seen the technology industry being scrutinized as the government has increased regulations, imposing fines on big technology companies. The regulations were sparked by the infamous speech of Jack Ma, the founder of Alibaba, who criticized the government on several issues regarding the sectors’ regulation. This sparked a total review of the technology sector by the government and three factors became apparent regarding the government’s move:

  1. China seeks to regulate the financial system as big technology firms have been paying out loans, not on their balance sheets, but on banks’ balance sheets that have partnered with the technology company’s platforms, there not taking any risk. If there’s a default on these loans, that puts systemic risk on the financial system and not technology companies.
  2. The regulation of data collection has become imperative as the government sees data as a factor of production. The vast data points collected on citizens has given technology companies unquantifiable amounts on data and hence patterns on Chinese citizens and hence power. This amount of power cannot be privately owned and is of national interest as the listing of some of these Chinese companies on foreign exchanges essentially allows foreign shareholders to have access to Chinese citizen data.
  3. The amount of power gained over the years by the technology companies can be used to exploit consumers and prevent market competition. Case in point is how Facebook was implicated in interfering with the elections of the USA and has yet to be punished accordingly. The Chinese government doesn’t want that much power to be in the hands of technology firms, especially when some of them list offshore in different jurisdictions posing as a threat to national security.
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The clampdown has resulted in technology companies suffering with Tencent down in excess of 20% on the Hang Seng Index year-to-date. Naspers/Prosus has a large stake in Tencent and being one of our largest positions in the general equities, is also down 30% for the year following the clampdown. It does seem as though the noise is dying down, but global investors are still very jittery. Nonetheless, the Chinese economy has powered ahead with GDP projections still at 8% for 2021 even though inflation has begun to decrease. The government went on to inject $154bn into the economy to provide more liquidity. This will maintain good credit conditions for manufacturers such as those in the commodities sector, thereby maintaining the commodities boom for countries such as South Africa.

South African Themes

Economically, South Africa continued its recovery seen by car sales being up 20% year-on-year for June. The economy reported a GDP increase of 1.1% for the first quarter, translating to 4.6% versus expectations of 3.2% for the year. We saw the current account surplus sit at 5% of GDP, much higher than anticipated at 3% mainly driven by the resources sector due to the exporting of commodities, and business confidence rose to 97% versus the 94.7% for June. However, July confirmed that the recovery is not being felt by all as we saw unemployment numbers increase to decade year highs at 34% as Covid restrictions were being increased due to the third wave of the pandemic, spurred on by the Delta variant. All of these factors created the perfect conditions for unrest in the country and all it needed was a spark.

That political spark was provided when former President Jacob Zuma was arrested for contempt of court and sentenced to 15 months in jail. Jacob Zuma handed himself in peacefully. But that triggered riots in KwaZulu/Natal that spread to Gauteng. For a week, the looting and unrest carried on as the authorities tried to get a handle on the situation and eventually 2500 military personnel were deployed to calm the situation. The Rand weakened as a result of the riots and the JSE saw its first month of negative returns for 2021. The miners assisted in decreasing the downward movement just before the month closed out, managers saw an opportunity to buy more shares, especially in the property sector.

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Property

The table below summarizes the property companies that had reported on the damage suffered during the extensive riots, looting and vandalism experienced over the week. At the beginning of the week, the benchmark (All Property-J803) was up 3.37% and by the 14/07/2021, the index was down-4.74%, with our portfolio being down -4%. When describing the nature of the impact of the riots, KwaZulu/Natal properties suffered the more extensive damage than Gauteng.

Property Company

Property Sector

No. of Properties Affected

Positioning in Portfolio

SA Corp Real Estate

Urban Retail

  • 4 KZN
  • 7 Gauteng

Underweight Benchmark (2.3%)

Resilient

Rural and Township Retail

  • 2 Gauteng

In line with Benchmark (7.5%)

Vukile

Rural & Township Retail

  • 4 KZN
  • 2 Gauteng

Overweight Benchmark (4.5%)

Dipula

Township& Urban Retail

  • 2 KZN
  • 10 Gauteng

No Holdings;

Benchmark (0%)

Arrowhead

Urban & Township Retail

  • 3 KZN
  • 1 Mpumalanga
  • 1 Gauteng

No Holdings; Benchmark (1.4%)

Less than 20% of our portfolio and the benchmark has been affected by the riots. Vukile had the largest exposure with less than 20% of Vukiles’ entire portfolio being impacted by the riots. Rural and township properties were more affected than urban properties. Over the last 500 days of lockdown during the pandemic, we witnessed rural and township properties being more resilient during the pandemic and thereby recovered quicker than the urban malls and centers, as Navigares’ research depicts on the graph below. Hence we anticipate that this trend will be assert itself again.

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Outlook

We made no moves in terms of the portfolio yet monitored the situation closely. The impact on the portfolio, being less than 20%, didn’t warrant for us to make any changes.

However, we see opportunity for urban properties, in the destruction of township and rural properties as communities seek alternatives for their needs. We anticipate that urban malls will benefit from the situation along with those malls which weren’t affected. As well, the disruption of the supply chain in terms of goods will benefit properties which weren’t destroyed during the riots. This was seen with Fourways Mall in Johannesburg, operated by Accelerate Property Fund, as shoppers did their panic buying due to the anticipated shortage of goods caused by the riots.  The picture below shows the estimated damage by the riots, which will mainly be covered by insurance and Sasria and other insurance companies having declared that they have the balance sheet to meet the anticipated claims, supported by government.

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We ask you to be safe and feel free to contact us with any questions and we appreciate your support and confidence in us, in being able to manage your wealth.

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