MSM Property Monthly: Another 7% for YOUR wealth in August

DEAR INVESTOR,

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Highlights:​​

• Listed Property up 7%
• Year-to-Date, up 27%
• General Equities up 14%, Year-to-Date

Performance

August provided another growth period of 7% for your wealth in one month as listed property powered ahead, ignoring all news regarding Covid cases across the world and the high unemployment in South Africa. To date, your wealth is up 26% for the year for listed property, beating the ALL Share index. The general equities mandates are up 14%. Both have beat the ALL Share Index, which dropped by -1.7% for August and is currently up by 12.5%. Our biggest contributors to the performance was Vukile, which saw a 12.5% increase alone in one month, boosting the returns for your wealth. This year listed property is making up all of the gains that had been lost last year during the pandemic and we believe the sector will breach 30% for this year, as the market runs ahead of expectations regarding how central banks will react.

Global Market Themes

Emerging Market (EM) equities bounced back during August, with the MSCI EM Index delivering 2.6% in US Dollar (USD) terms. Developed Market (DM) equities were not far behind, as the MSCI World Index posted a solid 2.5% in USD. The S&P500 returned 3% as appetite for equities grew as investors searched for more risk assets. America’s GDP grew at 6.6% for the second quarter of 2021 as the economy maintained its recover trajectory. This was supported by the strong job data of 943K jobs being created and unemployment dropping from 5.9% to 5.4% in July. The strong demand for labour, which has become a constraint, had led to strong wage growth, adding to the inflation being witnessed. Consequently, the Federal Reserve addressed the pressure being given by market commentators on inflation, by speaking at the Jackson Hole convention and confirming that tapering will occur later in the year at current projections and that interest rates would only be increased next year. This gave markets the extra risk appetite, pushing global markets higher. Earlier in the month, the number of pandemic cases in the US saw a marked increase with some days recording 100k cases reported per day, prompting calls for booster shots. These concerns were felt through the markets as commodities came of highs with oil taking a hit. Nonetheless, President Biden pushed the $1 trillion infrastructure bill which was concluded, which will act as a support for commodity prices.

European stocks also fell off earlier in the month as Delta variant cases rose across the western world. However, the effect on Europe was less than that of the US as cases maxed out at 71 000 cases per day, stabilised due to the aggressive vaccination program. The European economy still saw growth in the second quarter, beating estimates and inflation increased to 3% in August from 2.2%. The European Central Bank, unlike the Federal Reserve in the US, will be taking a more hawkish stance as they will look to increase rates if inflation gets too high and will do it soon. Yet, the central bank does believe that current inflation rate is “transitory” due to the eurozone economy re-opening due to the lockdowns.

Emerging market equities were partly driven by events in China. The MSCI EM Index closed 2.6% higher in USD, while the MSCI China Indices closed 1% higher, lagging the rest of the world. Even though China has had to confront increased Delta cases in 14 of the 32 provinces, the main drive in the underperformance of the markets has been the Chinese regulatory crackdown (precipitated by Jack Ma’s comments) on the technology sector. As highlighted in our last newsletter, the government is regulating the sector as it believes it is of national interest in terms of data collection, the technology sector may pose a risk to the financial system through the short-term loans the sector issues and finally, the sector yields too much power with their monopolistic forces they exert on smaller technology businesses. This has put pressure on Chinese markets, and it is not yet clear as to when the crackdown will end. This has contributed to the softening of commodity prices as investors are scared that the crackdown will spread to other sectors such as construction and materials. We still believe that commodity prices in the short-term may soften but with infrastructure programs being pushed across the world, this will increase commodity prices in the long-term. Besides America and South Africa and the UK, India passed a $1.4 trillion infrastructure package which will also assist the economy in getting back on its feet.

​South African Themes

In South Africa, the president moved to reshuffle his cabinet in response to the growing unease regarding the effectiveness of his administration whilst also replacing the finance minister as Tito Mboweni bows out from government. Meanwhile, Delta variant cases stabilised along with the progression of vaccination. However, vaccination rates are low due to slow uptake of the vaccines by the general population with only 20% of the population having been vaccinated. The president decreased lockdown restrictions from 4 to 3 as the number of cases decreased.  Manufacturing numbers came out at 57.9 points as opposed to 43.5 points in July, showing an expansionary recovery after the July unrest. However, the unemployment rate increased to 34.4% and with the extended definition (including those who have given up looking for work) increasing to 44%. The all share index also softened for the month at -1.7%, mainly on the back of the Naspers/Prosus transaction which saw trade of R148 billion on the Johannesburg Stock Exchange.

​Property

The financial sector on the Johannesburg Stock Exchange along with the listed property sector lifted the ALL Share Index as the rest of the market decreased. Listed property was lifted by Rand local listed property companies beating the offshore component of the portfolio. Companies reported their results and the quick recovery of the sector from July’s unrest. For example, Vukile reported that they were on track to repair the damaged malls and centres without having received the insurance pay-out as yet, which takes 6-10months. Sasria also reported that so far, they had received R14bn worth of claims which they could be able to meet.

Going forward, we believe the future of listed property is bright even though there will be several changes within each of the subsectors, especially offices. With vaccination programs across the world gaining momentum and business leaders urging their employees to get back to the office, there’s hope for the office property, even though the onslaught of work-at-home has had devastating consequences. Even before the pandemic of 2020, office vacancies had been sitting at 12% across South Africa and are currently sitting at 15%, with nodes such as Sandton sitting at 22%. Nonetheless here are our viewpoints on the office market going forward:

1. Overall demand for office space

An organisation’s need for office space remains, but the way we use offices will change. While most firms and employees will not go back to pre-pandemic levels of office use, it is also unlikely they will maintain a full WFH model. It is difficult to estimate the overall impact on demand, as we see both forces that could drive an increase in demand — as well as some pressures that may reduce it.

2. Employers focus on employees

Many surveys are focused on what employees want in an office facility, and firms are adjusting plans to meet these requirements. Centrality, ease of access, and high-quality amenities are high on the list of priorities.

3. Location pressures

The shift to increased time working from home has led to discussions as to where to best locate office facilities in order to maximise connectivity.

4. Sector clusters drive demand

Growing technology firms have driven office space development in tech clusters. Across Europe, there is a likelihood of increased clustering of industries such as tech and life sciences, similar to the preponderance of tech in the Bay Area in San Francisco.

5. Flex space operators

 The growth in recent years of WeWork as a provider of flexible office and co-working spaces has thrown a spotlight on the overall provision of such facilities. This varies materially across European cities, but it remains an important factor to monitor given the likelihood of operator consolidation as this sub-sector matures.

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.