2019/05/23 00:00:00

South African assets were boosted over the quarter primarily by the easier global monetary outlook, recording gains across all asset classes. This mixed with some still-gloomy sentiment locally. The economy emerged with growth of 0.8% in 2018, slightly above expectations. Still, this was a very weak absolute growth level, and the SARB is now projecting only 1.3% GDP growth for 2019 (down from 1.7% previously), not including the negative impact of any ongoing electricity cuts. In some growth-positive news, retail sales growth recovered somewhat to 1.2% y/y in January from the shocking -1.6% y/y in December.
The SARB decided to keep interest rates on hold at both its January and March MPC meetings, with the latest interest rate projection model showing only one 25bp rate hike this year. Finance Minister Tito Mboweni's February Budget was greeted favourably by most analysts, reinforcing the government's commitment to reining in the budget deficit and cutting spending, while also reforming and reducing wastage at the parastatals.
Moody's sovereign credit rating report was expected on 29 March. While many were pessimistic, Moody's final decision not to review the rating and leave it at investment grade with a stable outlook granted the country a big reprieve on the final trading day of the quarter. However, the SARB remains concerned about future inflationary pressures arising from the weaker rand, as well as higher costs from fuel and electricity, among other sources. Other worries for investors remained Eskom's generation capacity and the negative impact of load-shedding on growth in 2019, the land expropriation debate, nationalisation of the SARB, and last but not least, the upcoming May elections.
Despite US dollar strength, the rand lost only 0.5% versus the greenback, but 2.1% against the UK pound sterling, while gaining 1.3% against the euro, which was hit by growth concerns and more dovish interest rate expectations.
For the major listed property companies, the actual-delivered growth in distributions per share averaged 5.3% for the last six months' reporting cycle. We estimate that one-year forward earnings forecasts for the SAPY, excluding developers, grew by 3.6% on an annualised basis over the quarter. This implies slight downgrades to forecasts for the sector (relative to expectations) given that the consensus forecast for growth rates have been around the 6.0% mark.
The decline in the SAPY index over February and March was largely on the back of the de-rating of Rebosis B, Fortress B, Accelerate and Hyprop. Local property fundamentals appear to have deteriorated further, with the office sector remaining the weakest. In the retail sector, trading density growth weakened marginally. The restructuring of the Edcon group and their brands put further downward pressure on the listed property retail sector.
PERFORMANCE
The fund returned 0.9% (net of fees) for the first quarter of 2019, underperforming its benchmark by 0.6%. This was largely as a result of overweight positions in the Delta Property and Rebosis Property Funds.
These positions are examples of our risk-conscious approach to active stock selection and our fundamental investment strategy; being underweight large-cap and lower-yielding stocks and holding excess weight in higher-yielding stocks. For the 12 months ending 31 March 2019, the fund returned -7.6% (net of fees) while the benchmark returned -5.7% over the same period.
STRATEGY AND POSITIONING
We view current property valuations as attractive relative to inflationlinked bonds (ILBs). In the absence of a material change to the market's valuation (or rating), listed property is priced to deliver double-digit returns (roughly 13.0%) over the medium term, well above inflation.
An important aspect of the investment case for listed property is illustrated by comparing property yields to those of inflation-linked bonds (ILBs). Currently the SAPY is priced to deliver a one-year forward distribution yield of 10%. This yield exceeds the 10-year ILB yield by over 6.0%, assuming property yields remain constant. In our view, this return premium is commensurate with the elevated risks of investing in listed property at present.