31 Dec
Newsletter

MSM Property Monthly: Goodbye 2021

DEAR INVESTOR,

To get the latest information regarding property minute by minute, please follow us on Twitter (@MSMProperty) and for property in all of its form, follow us on Instagram (@msmproperty)

As we say Goodbye to an eventful year, we look forward a refreshing 2022. With next months newsletter, we shall go through out 2021 report card and make predictions for the coming year, so don’t miss it!

Highlights:​​

  • Listed Property up 27%, Year-to-Date
  • General Equities up 30%, Year-to-Date

Performance

We fell behind the index due to our portfolio being in a defense stance and changing of it to risk-on, resulting in the listed property portfolio being up 1.47% versus the All Property Index finishing the month of November off at 2.17%. For the year-to-date performance (1st January to 30th November 2021), the listed property portfolio is up 27.3% whilst the general equities portfolio is up 30% versus the All Share index benchmark at 24%. If you had your money in cash (typically fixed deposit), you would have only earned at best 6% pre-tax with official inflation rate being at 5.5% which automatically pushes you into negative real growth (-1%) of capital. This means that you would have technically lost money due to placing it in cash and not investing. Hence why Ray Dalio, a now famous American investor billionaire, states that “Cash is trash” when central banks have increased money supply thereby increasing inflation which lessens your buying power. Instead, one should invest it and cash is only critical once in every 8-10 years, typically during a crash, which should be used to buy more inflation beating assets.
Picture

Global Market Themes

The increased amount of monetary stimulus in America’s economy has been a source of contention as the markets have pressured the Federal Reserve to increase interest rates, due to inflation being at 6.2% Even so, Jeremy Powell, who was re-elected by Joe Biden turned hawkish and announced tapering of $15bn worth of bonds for the month of November and December each but did not increase interest rates. Even with unemployment being as low as 4.2% and 604k jobs being created during October beating expectations, the Fed still seeks full employment and will start to increase interest rates in 2022. Some economists have predicted that there will be 3 interest rate hikes so that the Fed can gain control of the runaway inflation. The emergence of the Omicron variant, discovered by South African scientist set global markets for a correction but bounced back as more data came out regarding hospitalizations, leaving the markets down by 2.2%.
Picture

The Eurozone and UK regions followed suit as markets dropped with the STOXX All Europe down by 2.8%, and the UK imposing travel bans on South Africa and other southern African countries even though Omicron was found to be first identified in Europe and the UK fairing much worse in terms of cases and hospitalizations. The Eurozone saw mixed economic data and witnessed a surge in Covid cases as the region went into winter. The discovery of Omicron also put the ECB on the back foot with increasing interest rates as everyone assessed the new variant and its possible effects on the economy. In Asia, China saw a marked increase in Covid cases with some regions going under lockdown. The Chinese economy saw producer inflation beat estimates along with retail numbers being better than expectations. Chinese leaders also met to discuss the future of the economy for next year and the central bank of China announced cheaper funding to the banks so as to assist them with the faltering property developers such as Evergrande as the highly indebted companies are taken over by the government regulators and managed.
Picture

​South African Themes

For South Africa, the low turnout for elections handed the ruling party an embarrassing loss of several municipalities as the ANC government missed the 50% threshold for majority, which had never been witnessed since the 1994 elections. Markets were then suddenly hit hard by the Omicron sell-off as South African scientists discovered the new variant with several western countries putting travel bans on the country. Nonetheless, the mid-term budget announced by the new finance minister revealed an improving fiscal situation with debt to GDP decreasing from 81.9% to 69.9% and a projected 5% increase in South Africa’s GDP for 2021. Fitch Rating Agency released positive news by increasing South Africa’s rating from negative to stable and the reserve bank increased interest rates by 25bps so as to curb the rampant inflation which came in at 5.5%

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.
29 Sep
Newsletter

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

DEAR INVESTOR,

To get the latest information regarding property minute by minute, please follow us on Twitter (@MSMProperty) and for property in all of its form, follow us on Instagram (@msmproperty)

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.
Picture

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.
Picture

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.
Picture

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.
Picture

​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.
Picture

​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.
Picture

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.
01 Sep
Newsletter

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

DEAR INVESTOR,

To get the latest information regarding property minute by minute, please follow us on Twitter (@MSMProperty) and for property in all of its form, follow us on Instagram (@msmproperty)

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!
Picture

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:
Picture

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.
Picture

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.
Picture

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.
Picture

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.
Picture

​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.
Picture

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.
Picture

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.
28 May
Newsletter

MSM Property Monthly: Another 11% for the month of April!

DEAR INVESTOR,

To get the latest information regarding property minute by minute, please follow us on Twitter (@MSMProperty) and for property in all of its form, follow us on Instagram (@msmproperty)

HIghli

Performance

Performance for the month of April was dominated by the reflation trade; a look into inflation coming back due to the trillions of dollars pumped into the global financial system as a means of saving it from the devastating effects of the Covid-19 pandemic. We saw commodities run up as the market perceived inflation to be running away, pushing the local commodity sector and lifting the Johannesburg Stock Exchange (JSE) which contributed to the MSCI World going up 4.6%. The Property sector outperformed the whole of the JSE with an increase of 11.48% whilst we came in at 11.08%, on the back of taking profits too early. The table below shows our performance and critically how we have been able to beat the benchmark for the year so far.
Picture

Global Market Themes

Global equities rallied across the world as the vaccine rollout, specifically in the western hemisphere, picked up in pace as pandemic cases collapsed in the U.S as President Biden pushed ahead, working on achieving his promises for the 4th of July. Investors believe that the inflation threat will prompt an early response from the Federal Reserve of the United States to act against inflation. However, markets were disappointed to see how the Federal Reserve responded with rates being unchanged, even though the market piled on pressure towards the Fed. The temporary increase in inflation was not enough for the Federal Reserve to act and the institution sees the minor spike as a result of the reopening of the economy and not an indication that the US economy has fully healed. This was confirmed with the disappointing jobs data for April where financial markets expected 1 million jobs to be created yet only 266,000 jobs were created. This was accompanied with the revision down of March jobs from 916,000 to 770,000. Hence, the Fed has maintained its ultra-easy policies.
Picture

Specifically with jobs, President Biden pushed ahead with the $2 trillion infrastructure package which will create jobs and address climate change concerns for the country as it wants to be the world’s leader in climate change and maintain its lead in technology. Biden is also scheduled to announce the $1.8trillion spending package focused on education and worker benefits. Meanwhile the Eurozone has also increased its vaccine rollout program, but at a slower pace. The UK has maintained its lead in vaccine rollout along with economic data such as purchase managers index at 60points whilst continental Europe has struggled. This has been reflected in Europe’s gross domestic product which saw a decline of -0.6% for the quarter, after a -0.7% decline in the previous quarter, putting the Eurozone in a technical recession. However, European companies have been beating estimates in reporting recovery earnings contrary to expectations based on GDP.
Picture

China’s GDP surprised the world as it reached a record of 18.9% for the quarter, the highest since 1990. This is a result of successfully implementing a vaccine rollout, the bouncing back of the economy and the bouncing back of exports for the globe which wants Chinese products due to the world’s factories stalling. The economy is projected to exceed 8% for this year as it sees a surge in growth figures such as retail at 17.7% and fixed asset investment at 21% in the last month. However, ruling Communist Party leaders noted that the recovery is uneven and not solid.
Picture
Chinese Plenum

​South African Themes

South Africa was a recipient of investment flows as the Rand strengthened to R14.51 against the US Dollar as commodities continued to rally bolstered by the inflation debate. Subsequently, consumer price index for the country came in hotter than expected for April at 3.2% year-on year, beating expectations. Meanwhile, the South African government reignited the deadlocked public sector wage talks with unions. The ruling party pushed ahead with the Step Aside policy that saw Ace Magashule being suspended from the party and other potential party members also being highlighted due to corruption charges. This is part of the “clean up” that President Cyril Ramaphosa had envisioned. A point of interest has been the resilience of the market against all the political news where the JSE was up 0.97% for April, with property sector leading the charge at 11.4%
Picture

​Property

The property sector led the recovery with a 11.4% performance for April as the Rand strengthened in a risk-on environment. This is contrary to the March reporting season with companies reporting poor results, reflecting the dire situation on physical property. There’s definitely a disconnect from listed property and direct property and this has mainly to do with the valuation. Listed property still trades at a ~30% discount to NAV and this is the primary driver of recent performance, the undervalued nature of listed property. What has been positive is the return of the work force to offices and the return of higher income earners to Super Regional Malls, a phenomenon witnessed at Sandton City by Liberty Two Degrees. All of these factors have raised the interest in the sector, and we anticipate that other equity managers will flock back to the listed property sector, as its metrics improve along with the cheap valuation of the sector. We still hold our assertion that listed property will be up by more than 25% for 2021.
Picture

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.
30 Jan
Newsletter

MSM Property Monthly: December 2020

DEAR INVESTOR,

To get the latest information regarding property minute by minute, please follow us on Twitter (@MSMProperty) and for property in all of its form, follow us on Instagram (@msmproperty)

Performance

Welcome to 2021 and all the best for this year. We followed up Novembers’ stellar performance of the listed property mandate of 21.5% with a 13.71% return for the month of December, beating the ALL Property Index at 13.27% as we ended in the Top 5 out of 40 property funds in South Africa. The general equities mandate yielded 4.2%, beating the ALL Share index at 3.72%. The risk-on sentiment, supported by the Biden win and vaccine news, pushed global markets up as the S&P500 rose by 3.84%, ending the quarter at 12.5% (reaching all-time highs). Europe witnessed higher markets as the Eurostoxx 500 added 4.32%, ending the quarter being up 17.20%. Similar gains in the East were seen as Chinas’ CSI 300 Index and Japans Nikkei 225 Index closed the year up 5.89% and 4.87% respectively for the month. The MSCI Emerging Markets returned 7.35% for the month and 19.70% for the quarter. Even though the month saw the US Dollar continue with its decline, emerging markets, Gold and Bitcoin (the cryptocurrency breached $20 000.00, reaching all-time highs) were the recipient of the flows from the Dollar.
Picture

Global Market Themes

With the falling Dollar, American states went into lockdown as the Covid-19 death rate reached 3000 per day (the highest in the world). With such high numbers, several doubts arose regarding the sustainability of the American economic recovery as disappointing jobs numbers came out. Even so, the unemployment rate has improved and fallen to 6.7%. The Federal Reserve supported the worrying sentiment and spoke to the patchy economic recovery due to the damage cause by Covid-19. The Fed asked for both the democrats and republicans to work on another stimulus which the economy needed. We also saw the decline of oil in response to the negative economic news and outlook for the American economy. Not only that, OPEC met to discuss the cutting of 7% of global oil output, which they agreed upon.
Picture

The weakness in the Dollar was supportive of European markets as they received flows of $1.7 trillion as part of the value rotation from growth stocks. European markets were also boosted by the EU approving a $2.2 trillion stimulus plan backed by joint debt and cash as the zone’s biggest economy, Germany, saw exports rise less than expectations which worried Brussels. The EU and UK finally completed the arduous Brexit deal, which had been held up by fishing rights. The pound improved as the UK became the first western country to approve the Pfizer vaccine. Asia saw similar gains as funds flowed into emerging markets with China releasing strong manufacturing numbers, the strongest in a decade. China eased the restrictions against Australian coal, a sign of easing in tensions in the trade war between the two nations, mentioned before in our previous newsletters.
Picture

​South African Themes

Global managers sought emerging market stocks, pushing the JSE higher whilst President Ramaphosa imposed stricter measures to counter the second wave. The country officially entered the second wave as infections exceeded 6000 per day. The President pushed on with the step-aside policy at the ANC’s NEC committee meeting as part of his pledge against corruption in the state and party. With the party, Ace Magashule whose been charged with corruption allegations, will appear before the parties integrity commission and to appear before a court judge in the first quarter of the year. The presidents economic plan started bearing fruits as business confidence rose unexpectedly even though October retail figures decreased by 1.8%. The manufacturing PMI numbers came in at 52.6 adding to the three consecutive months of expansion. The current account for GDP surged to 5.9% versus -2.91% for third quarter. All of this economic activity culminated in an increase of 66.1% in the third quarter from -51.7% in the second quarter, beating estimates of 62.9%. The main drivers of the activity were household consumption and net exports (driven by commodities). This has changed the outlook for GDP which previously was -8.1% for 2020, being increased to -7%. Expectations for 2021 are higher at 3% due to the rebound expected.
Picture

​Property

As the great rotation pushed through December, we printed 13.71% versus 13.27% for the index. The positions that contributed the most to the months’ absolute performance were Redefine Properties Ltd (+40.51%), NEPI Rockcastle PLC (+18.68%) and Growthpoint Properties Ltd (+9.60%). The largest detractors from the months’ absolute performance were Liberty Two Degrees Ltd (-17.95%), Investec Australia Property Fund (-5.37%) and Stenprop Ltd (-0.79%). This correlates with the mall activity seen where small regional centres lead the recovery with super regional centres lagging the most in recovery.
Picture
Source: Navigare

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.
19 Mar
Newsletter

Corona Virus Special

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.

Picture

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.

Picture

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.

19 Jan
Newsletter

January 2020 Newsletter

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.

19 Nov
Newsletter

November 2019 Newsletter

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.

18 Oct
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.

18 Sep
Newsletter

September 2019 Newsletter

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.

Picture

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.

Picture

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.

Picture

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.

Picture