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.

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

For the month of April, performance was up by 2.3% closing out the first quarter of the year. Cumulatively, that brought returns of 2% for the quarter as globally, stocks saw their best returns in the last nine years. The quarter had started on a more positive return (7.3% for the month of January) as a recovery from the difficult last months of 2018 saw fund managers picking up equities at cheap valuations. The main drivers of the returns were the possible resolution of trade wars between the U.S. and China, the U.S federal Reserve halting back the increase of interest rates for the year with the South African Reserve bank and other global central banks following in suit. In addition, China’s economic recovery continued due to stimulus placed which yielded results where manufacturing managers increased their purchases along with consumer confidence increasing in the world’s second largest economy. Detractors of performance for the quarter were factors such as Brexit, where Theresa May postponed the conclusion of Brexit due to the impasse of her and the British parliament whom subsequently rejected her deals. Local factors were the most evident as rolling Eskom blackouts hampered confidence in the economy and the consumer had to bear petrol price increases and the weakening of the Rand, which was subject to local and international factors such as Turkey. Also, we saw the IMF and Reserve bank downgrade economic growth for South Africa.

Property

In terms of property, the offshore Eurozone portfolio continued to perform well as industrial property was the recipient of structural changes in the patterns of shopping by consumer. This was followed by offices and then retail. Both industrial and office portfolios saw rental growth whilst retail began to see negative growth in rentals. For Britain, it bore the most pain in terms of retail as the transformation of retail from main street to digital occurred. Germany, mainly Frankfurt, was the biggest recipient of companies moving away from London due to the Brexit saga as companies prepared for the worst-case scenario.

Back in South Africa, like offshore, the best performing sector was industrial property, followed by retail and finally office.For the quarter, industrial property saw rental growth of 4.6% with a vacancy rate of 3.6% (the lowest) as demand for large industrial properties continued to outstrip supply. The industrial space saw an improvement in the growing manufacturing, a sign of the growth-shoots expected as the new president returned manager confidence.

The overall retail vacancy sat at 4.2% coming down from 5.9% in 2018 as the sector saw an improvement in the footfall of certain centres. The Super regional malls such as Mall of Africa, in Waterfall City, and community centres where the best performing formats of property due to convenience and pricing for clients (depicted in the table below). Also, we saw an improvement in consumer confidence.

Source: SAPOA

The worst performing sector was the office sector with an average 11.2% vacancy rate. Due to excess stock and the lack of backfill from emerging companies, the high vacancy remained undeterred with City of Cape Town having the lowest rate at 7.7% and eThekwini having the highest at 13.5%. Special mention goes to Sandton CBD, commonly known as “the richest square mile in Africa” which sits on vacancy rates of 17.6% due to development outstripping demand and tenant consolidations resulting in rental growth remaining negative.

Looking forward, the month of May will be a busy many property companies releasing results and South Africa going to voting booths.