MARKET REVIEW – LOCAL
Listed property suffered a third consecutive quarter of negative returns in 3Q2018, with the SA Listed Property Index (“SAPY”) and All Property Index (“ALPI”) returning -1.0% and -1.5% respectively. Despite bond yields rising, bonds (ALBI) were the best performing asset class with an 0.8% total return. Equities (ALSI) underperformed with a total return of -2.2%. Year-to-date, listed property is deeply in the red (SAPY: -22.2%, ALPI: -20.0%) while cash is the best performing asset class (+5.4%), followed by bonds (+4.8%) and equities (-3.8%). The quarter unfortunately started off on the back foot in the eye of the storm as the emerging market sell-off was in full swing while the US / China trade war gained momentum. The risk-off sentiment once more put downward pressure on both the rand and local bonds.
The sector sits in a similar position that it was in last quarter, with weak fundamentals compensated by attractive valuations. The ALPI is giving a forward yield just under 9% with growth in the mid-single digits. We believe, barring any extreme outliers, this base can deliver circa 12% total returns into the medium term.
And while we do see value, we are aware of the likely headwinds. Bond yields globally are trending higher, and this coupled with political volatility coming into an election year could see a spike in local bond yields, (our exit 10-bond yield assumption sits at 9.7%). Operationally we are also concerned as sentiment is negative, the consumer is struggling, and it is unlikely to see any material investment until there is some clarity post elections; with this we are worried that the likes of Edcon may not post the earnings required to appease bond holders. Fortunately, the ALPI provides for a more heterogenous array of counters from which there will be winners and losers. We believe that with the choice we have we can maintain our consistent outperformance of the benchmark through active management and that total return prospects should start to improve, although not without volatility.