MSM Property Monthly: Goodbye 2021
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Corona?
Within three months, a humanitarian disaster has knocked the world of its feet as the Coronavirus, aka COVID-19, exploded onto the global stage by infecting China, with Wuhan City being the epicentre of the contagion. The virus, for whom there is no cure, has drug companies franticly working towards finding a solution in the form of a vaccine. The World Health Organisation (WHO) has reported 20 vaccines so far being developed. As the virus has spread throughout China, global markets assumed that this would be a China and Asia based problem which appeared to be under control. As China reported on the numbers (which have been suspected to not reflect the real extent of the disease), the impression given to the worlds media and global markets were that it was under control and that the severity of the disease was less than the previous SARS virus reported back in the 2000’s due to the death rate sitting at approximately 2%. The critical juncture for the disease was once it spread to South Korea, Japan and specifically Italy. Once it arrived on the shores of Italy, the speed at which it spread raised alarm bells globally (also raising questions of western countries prepared levels as opposed to Asian countries).The spread of the virus was amplified by social media along with the meme’s adding to the panic. By the 9th of March, the virus had killed 3500 people and had infected 105 000 individuals globally.
The fact that one in five infected individuals have to be hospitalised and the infectious nature of the disease, places strain on existing medical health care systems which are not designed to cope with large numbers. The virus being more lethal with the elderly where fatality rates are three to four times higher in individuals in the 70’s adds onto the burden on health systems. Also, the seasonality of the disease is in question. The disease seems to thrive in colder environments which may explain the spread of it in the northern hemisphere as opposed to the southern hemisphere because of summer keeping it at bay. The disease has milder cases which are still being understood and evidence is mixed regarding the symptoms and length of incubation (which is currently understood to be 10 to 14 days where a person may carry the disease without showing any symptoms). This has led governments to place strict measures so as to slow down the infections by closing schools, encouraging self-quarantine and cancelling of gatherings such as restaurants, bars and conferences.
Global Economy
It’s exactly those measures on individuals by not going to work and sporting events, from Grand Prix to Soccer matches, being cancelled that has raised questions of how deep the damage has been to the Chinese and global economy. Compounding the problem is that China is the world’s factory thereby creating a supply chain shock which has not been understood. Evidence of the severity of the disease on the economy is that of car sales in China dropping by 92% in the February and Apple running out of devices due to the lack of manufacturing capacity. In response to both the supply and demand shock, the oil producing nations (OPEC) convened a meeting regarding the cutting of oil production. Unfortunately, Russia and Saudi Arabia had a fall out regarding how deep the cuts should be and Saudi Arabia announced an increase in oil production resulting in the oil price plummeting and adding to the nervousness in the markets as global markets fell. The ripple effect of China has yet to be felt but we believe that the Chinese economy will fall below 2% in GDP, currently sitting at 6%. This will be felt by other economies who depend heavily on Chinese goods and manufacturing and exporting to the region.
As the disease has spread, it has also caused a demand shock caused by consumers staying at home due to the restrictions. These effects have yet to be measured as they add onto the anticipated recession in Europe and the confirmed recession in South Africa. Central banks all over the world have cut rates aggressively so as to limit the damage. The Federal Reserve in the US had emergency cuts of 50bps (last seen with 9/11 attacks in 2001) followed by 100bps cuts with an injection of $700bn and China also cut rates and injected $178bn. We have yet to see and economic response from the South Africa government and whether the SARB will cut rates.
Portfolio Management
The markets had initially responded well to the emergency cuts by the Federal Reserve but then continued there downward spiral as the number of infections increased throughout the world. The All Share index has fallen by 32% since January as investors sold off assets amounting to more than R4 trillion. The markets themselves have dropped to levels last seen in 2012 as panic on the markets has ensued with investors closing out positions not favourably. No one asset class has been spared as property, general equities, gold, treasuries and even bitcoin have been sold as investors have fled to cash. The hoarding of cash has seen companies draw down on their bank facilities so as to weather the economic storm for the following months. Projections in terms of the duration of the economic collapse vary from 4 to 12 months. Yet we believe that the global economy will begin to turn in the third quarter as the virus maxes out on a global basis and the measures taken to contain it, take effect. Hence on the portfolio’s we have increased the cash portion so as to provide a buffer for portfolios. Typically, some clients may panic and want to sell. Yet we urge clients to stay the course since this drop has happened several times before in history and the winners have been investors who have maintained their holdings and some who have increased their holdings as great companies become ridiculously cheap. The holding of blue-chip companies on the portfolio also creates a buffer because when markets recover, these companies are always the first to recover because of their balance sheets
We thus urge you to contact us for any e-meetings and for more information regarding the markets and welcome any comments during this unprecedented time. When it comes to investing, now is not the time to panic. The old adage of time in the market being better than timing the market still holds.
Welcome Back to 2020!
Performance
The year began with an optimistic tone as global markets continued their rally, mainly being pushed by U.S markets, driven mainly by the technology sector. Last year, global equities were up 24.1% with the U.S. being the best performer and emerging markets being the worst. The American economy set an all time high and the world breathed a sigh of relief as the U.S and China signed the initial trade deal termed ‘Phase One’. This doesn’t equate to tariffs being removed against China as this depends on the compliance of China. Also, China would purchase $200bn worth of U.S farm products and the U.S. would stop seeing China as a currency manipulator. China, to combat the effects of the trade wars, eased funding for their banks thereby cheapening credit.
Across the pond, we saw the U.K leave the European Union as the markets began to worry about the conclusion of a trade agreement between the two parties and how that would be structured. The UK economy, reflecting the tough time endured due to the Brexit saga, released weak economic data and the Bank of England did nothing to ease the situation by holding onto rates, much to the disappointment of markets. With the EU, Francine Lagarde became the ECB President, the first female to take the position, and maintained her stance on looking to clean up the European Union’s economy.
However, the month of January followed with two economic shocks which contributed to negative returns for the month. Firstly, the U.S/Iran tensions exploded onto global markets as the U.S performed a targeted strike against the highest general of the Iranian army, killing him in Iraq. This caused the jumping of the gold rice to $1600 and oil reached above $70. Markets prepared for an impending war to break out as rhetoric increased between the two countries. But fortunately, war was averted. The second shock was the beginning of the Coronavirus, a virus that emanated out of Wuhan, China that had a similar pattern and related to the SARS virus. As the numbers of casualties increased, so did global markets continue to worry about the disease and its spread across Asia and the world. What startled the market was the $170bn pledge of investment into the economy by the Chinese government as a measure and the building of a hospital in a week to house the number of infected individuals. As the month came to a close, global markets sold off and this contributed to the final total returns of -3.06% for SAPY and -3.30% for the ALPI indices whilst equites were also down by -1.69% as there was a flight to safety in terms of cash, gold and bonds.
Back in South Africa, the gloomy picture that was 2019 continued as consumer confidence numbers came out, showing that for the third quarter, confidence was -7%. Added onto this was the confidence of business owners which was lower than expectations at 45.9% as stage 2 power cuts by Eskom continued. All these factors affected retailers which released lack lustre results for the festive season. More importantly, Massmart announced the restructure of the business by shutting down DION Wired and letting go of 1500 employees. For 2019, the retail sector was down by 22%. Telkom as well jumped onto the bandwagon by letting go of 3000 employees as the business looks to reduce its head count. With all of the negative news, the IMF added onto the woes by cutting expected GDP growth of SA to less than 1% for 2020 and less than 1.5% for 2021. With all of this negative news, a sigh of relief was had as the SARB announced the cutting of interest rates by 25bps to ease the pressure on consumers. Also, the much anticipated downgrade of South Africa in March was delayed by Moody’s, stating that it was too early to downgrade the country’s rating.
Property
Local property now sits at very cheap rates with dividend yields now at an average of 10%. That’s means that for every R10 you place into listed property, you will receive R1 in dividends for the year before any capital growth or decline as opposed to cash in the bank that yeilds approximately 6%. The delaying of a possible downgrade has helped the investment grade ability of the local property stocks. Since half of the portfolio is offshore, this helps the growth of stocks as the Rand weakens due to domestic issues such as Eskom. Even though offshore dividends are expected to be in the region of 5% they are still anticipated to grow between 3-5% for the year as oppose to being flat in South Africa for 2020. We tilted the portfolio more towards offshore with the buying of additional UK stocks, especially those with high exposure to London due to the discount in value when compared to other European cities such as Paris and Frankfurt. The cheap valuations of London property stocks have primarily been driven by Brexit. We anticipate that as the British government gets on with it, large investments will flow back into the city as the economy recovers and as the consumer begins to spend again.
Performance
November saw volatility come back as the markets began to doubt whether the ‘phase one’ deal of the trade war between the U.S. and China would be completed. America’s economy continued to release good economic data with 76% of the S&P500 companies beating revenue expectations in their quarterly results. An example of this was Apple and Microsoft releasing good earnings which beat estimates. U.S. homes sales beat expectations and U.S. job data growth came in strong, overshadowing the trending negative manufacturing numbers caused by the trade wars. Global stocks took a breather from rallying as investors took stock of how far developed markets equities (supported by central banks easing) had run and being somewhat nervous about the next leg up for global risk assets. This culminated in profit taking and shifting of focus to emerging market currencies as the glut of funds in the system began to look for yield, with the South African Rand being one of the biggest recipients of ‘hot money’ due to our relatively high interest rates vs developed markets such as Europe and the U.S. These factors saw us losing -0.97% performance on the portfolio. But we used the opportunity to position the portfolio more towards the U.K.
As the Brexit saga continued, the negative effects have continued with British data showing a slowdown in business confidence. Even after the highly anticipated debate between Boris Johnson and Jeremy Corbyn seemed to iron out key issues, the lack of a clear winner added onto the malaise. Even with the economy having seen the slowest growth in a decade, the U.K. economy was able to dodge a recession. With mainland Europe, the slowdown in German manufacturing continued, mainly caused by trade wars. However, investors maintained their optimism with Eurozone as European company earnings for the third quarter came out better than expected.
South Africa continued to be dogged by negative economic news. This reached climax with the downgrade by Moody’s from stable to negative, citing lack of economic growth and reforms critical for the rejuvenation of the economy. The historic Rugby World Cup win by South Africa (seeing Siya Kolisi being the first black man to lift the cup as captain) lessened the blow as it brought much needed positive news. The Johannesburg Stock Exchange noted that due to the anticipated downgrade to junk status by March 2020, they had seen approximately R90bn outflow. This theme was re-iterated at the investment conference held in Sandton where President Cyril Ramaphosa was able to raise a further R371bn against a failing economy where business confidence dropped to 91.7, a fall of 2.4% year-on-year for the month of October. More data was released noting the number of consumers having impaired credit rising to 40.8% in the second quarter. This was evident when Truworths and The Foschini Group released poor earnings, citing weak consumer numbers. That being said, Black Friday saw sales across all retails rise approximately by 14% compared to last year. The Rand strengthen past R15 to the U.S. Dollar as optimism came in for the currency.
Property
Locally, several companies released results for the last 6 months. Rebosis saw the company not pay a final dividend as they dealt with re-organising the portfolio and decreasing the heavy debt burden. The company has also been selling off properties and engaging in a possible merger with another listed property company, Delta. Octodec saw their dividend drop by 1.2% as their residential portfolio took a hit citing the economy as consumers took on less residential stock. Investec Property Fund increased their dividend by 3.1% and noted that their South African portfolio was subdued. They mainly saw better results in Australia and have also been buying assets in the Eurozone. On the offshore side of the portfolio, Capital & Counties along with Intu and Hammerson (U.K. focussed property stocks) have been selling off properties so as to decrease their debt burden. Sirius, the German specialist, released very good results as the business model yielded good results by increasing the dividend by 8.6%. Self-Storage increased their exposure to U.K. by acquiring more properties. What is of importance is the UK elections for parliament which will hopefully bring more certainty to the UK environment. Growthpoint also looked to take advantage of the low valuations of Capital & Regional Plc., by buying out the business, which shareholders approved. The shift to UK stocks reaffirms the cheap valuations and our overweight stance in U.K. companies.
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.
Performance
November saw volatility come back as the markets began to doubt whether the ‘phase one’ deal of the trade war between the U.S. and China would be completed. America’s economy continued to release good economic data with 76% of the S&P500 companies beating revenue expectations in their quarterly results. An example of this was Apple and Microsoft releasing good earnings which beat estimates. U.S. homes sales beat expectations and U.S. job data growth came in strong, overshadowing the trending negative manufacturing numbers caused by the trade wars. Global stocks took a breather from rallying as investors took stock of how far developed markets equities (supported by central banks easing) had run and being somewhat nervous about the next leg up for global risk assets. This culminated in profit taking and shifting of focus to emerging market currencies as the glut of funds in the system began to look for yield, with the South African Rand being one of the biggest recipients of ‘hot money’ due to our relatively high interest rates vs developed markets such as Europe and the U.S. These factors saw us losing -0.97% performance on the portfolio. But we used the opportunity to position the portfolio more towards the U.K.
As the Brexit saga continued, the negative effects have continued with British data showing a slowdown in business confidence. Even after the highly anticipated debate between Boris Johnson and Jeremy Corbyn seemed to iron out key issues, the lack of a clear winner added onto the malaise. Even with the economy having seen the slowest growth in a decade, the U.K. economy was able to dodge a recession. With mainland Europe, the slowdown in German manufacturing continued, mainly caused by trade wars. However, investors maintained their optimism with Eurozone as European company earnings for the third quarter came out better than expected.
South Africa continued to be dogged by negative economic news. This reached climax with the downgrade by Moody’s from stable to negative, citing lack of economic growth and reforms critical for the rejuvenation of the economy. The historic Rugby World Cup win by South Africa (seeing Siya Kolisi being the first black man to lift the cup as captain) lessened the blow as it brought much needed positive news. The Johannesburg Stock Exchange noted that due to the anticipated downgrade to junk status by March 2020, they had seen approximately R90bn outflow. This theme was re-iterated at the investment conference held in Sandton where President Cyril Ramaphosa was able to raise a further R371bn against a failing economy where business confidence dropped to 91.7, a fall of 2.4% year-on-year for the month of October. More data was released noting the number of consumers having impaired credit rising to 40.8% in the second quarter. This was evident when Truworths and The Foschini Group released poor earnings, citing weak consumer numbers. That being said, Black Friday saw sales across all retails rise approximately by 14% compared to last year. The Rand strengthen past R15 to the U.S. Dollar as optimism came in for the currency.
Property
Locally, several companies released results for the last 6 months. Rebosis saw the company not pay a final dividend as they dealt with re-organising the portfolio and decreasing the heavy debt burden. The company has also been selling off properties and engaging in a possible merger with another listed property company, Delta. Octodec saw their dividend drop by 1.2% as their residential portfolio took a hit citing the economy as consumers took on less residential stock. Investec Property Fund increased their dividend by 3.1% and noted that their South African portfolio was subdued. They mainly saw better results in Australia and have also been buying assets in the Eurozone. On the offshore side of the portfolio, Capital & Counties along with Intu and Hammerson (U.K. focussed property stocks) have been selling off properties so as to decrease their debt burden. Sirius, the German specialist, released very good results as the business model yielded good results by increasing the dividend by 8.6%. Self-Storage increased their exposure to U.K. by acquiring more properties. What is of importance is the UK elections for parliament which will hopefully bring more certainty to the UK environment. Growthpoint also looked to take advantage of the low valuations of Capital & Regional Plc., by buying out the business, which shareholders approved. The shift to UK stocks reaffirms the cheap valuations and our overweight stance in U.K. companies.