In the following article we’ll give a brief summary of our expectations for the various asset classes. Most clients are invested across the various asset classes in the underlying funds that they hold within their portfolios.
Cash
Interest rates are expected to come down with inflation well within the reserve bank targeting range. The Rand has also strengthened significantly against major currencies over the last few months which should help bring down the fuel price and therefore filter through to reducing inflation. One can expect two rate reductions this year of 0.25% each. This will be good for people who are indebted but bad for retirees who rely on income.
Bonds
Despite global bond yields rising (fairly sharply), SA bond yields continued to gradually grind lower resulting in decent capital gains so far in 2018 (when bond yields decrease, capital values increase). The ALBI was up 1.9% in January and another 2.3% in February. The yield on the R 186 has now dropped to below 8.2%, levels last seen before ‘Nene-gate’ in December 2015. That said, over the last 2 years other Emerging Market bond yields have fallen significantly more than yields on our domestic bond market. Even after recent gains, SA bonds continue to offer attractive yields, especially when compared to other Emerging Market yields.
Listed Property
The SA Listed Property sector has been the one ‘SA Inc. sector’ which has not participated in the strong change in sentiment towards the domestic economy following Cyril Ramaphosa’s election as ANC President in December 2017. Concerns around the Resilient Group of companies (which consists of Resilient, NEPI Rockcastle, Fortress A&B as well as Green Bay with a combined weight of 42% on the South African Property Yield (SAPY) at the end of 2017) resulted not only in a sharp sell-off of these companies, but also negatively impacted sentiment towards the sector as a whole. The SAPY closed January 9.9% lower. These declines continued into February with the sector down another 6.6%. Year to date Resilient and NEPI Rockcastle have respectively fallen 44% and 45%. In addition, the property stocks with primarily offshore assets were also negatively impacted by a stronger Rand.
As a result of the negativity that has spread throughout the sector, there are a number of companies which are offering exceptional value and have not yet re-rated in line with most other ‘SA Inc.’ market sectors. On an overall valuation basis (price/NAV), the SA Listed Property sector (those companies with mainly a domestic asset base) are at the cheapest levels since ‘Nene-gate’ in December 2015. From a growth perspective, distribution growth is expected to be close to 8% over the next year which should translate into decent real returns for investors.
Allan Gray which, to our knowledge has never had any significant exposure to listed property in SA, has for the first time started taking up some exposure to listed property, an indication that asset managers are looking to take advantage of the recent fall in share prices. Bridge Fund Managers which runs income portfolios is very bullish on listed property and has stated that with the improving political and economic backdrop, yields should reduce and together with an acceleration in distribution growth rates should lead to total returns in excess of 20% per annum in 2018 and 2019.
Equities
Global equities started with a bang, gaining more than 7% in the first 3 weeks of the year. However, markets lost some steam towards the end of January, but the MSCI ACWI (a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world) still ended the first month of the year up 5.3% in US$. Concerns about rising interest rates on the back of strong growth (and inflationary risks) spooked equity markets and we then saw the MSCI ACWI selling off almost 10% in two weeks. “Pull Backs” are normal and provide opportunities for managers to buy and re-look at the risk in their funds.
Local Equities have been dominated by the improvement in sentiment towards the domestic economy. The Rand has now appreciated just under 20% since its recent peak at R 14.5/US$ in mid-November last year. These events, however, resulted in a bit of a mixed bag on our equity market with a sharp divergence at sector level between Rand hedges and SA Inc. At an overall level, the ALSI ended January flat (+0.1%). Then we followed global trends, falling more than 6% in the first 8 days of February. That said, a strong boost to SA Inc. resulted in our market recovering all losses and we are back to levels we saw at the start of 2018.
Currency
The question that seems to be on everyone’s mind is, “Is the Rand now overvalued”? At a recent investment forum this question was raised with some of SA’s top asset managers. The Rand often trades at a discount to the major economies due to a perceived “risk” of being an emerging market. Consensus seems to be that the Rand is 15% overvalued. However, if the Ramaphosa euphoria keeps ticking on and growth continues to surprise on the upside the Rand could actually keep on strengthening. The counter to this is if the land debate is not handled correctly then the Rand could weaken significantly.
As most of our clients’ portfolios have an exposure of more than 20% to offshore investments, the strength of the Rand in recent months has had a significant negative effect.
