The tale of the tape for the third quarter of 2019: Local equities fell 5% and local bonds returned nearly 1%, while global equities and bonds were approximately flat and 1% higher respectively in US dollar terms, and the rand weakened by over 7% against the US dollar.

Various measures have pointed to a broad-based slowdown in global economic activity, which was compounded by a re-escalation in trade tensions between the US and China during the quarter. In addition, the state of the UK political environment remains one of confusion with no clarity on the likely outcome. In response to the muted growth outlook and increased uncertainty, several central banks, including the US Federal Reserve, have clearly stepped off the brake and are slowly reapplying the accelerator. Time will tell if this is sufficient to offset the uncertainty created by political developments. In the meantime, equity markets remained somewhat directionless, while industrial metals continued to come under pressure. Global bond yields moved lower again and precious metal prices rose as investors sought safe havens. Many sovereign bonds are once again trading on negative yields, while the US 10-year bond yield reached a low of 1.5% before unwinding a little towards the end of the quarter.

The South African economy has been and remains tied to the hip of the global economy. Hence the impact of slower global growth filtered through to South African markets and the currency. While a Chief Reorganisation Officer was finally appointed at Eskom during the quarter, visa restrictions were relaxed on several countries and President Ramaphosa announced his Economic Growth Advisory Council, progress on inducing a meaningful economic recovery has been slower than many expected. At the end of September, the President published his first weekly newsletter – over the coming months this may shed further light on the focus of Government. The South African Reserve Bank trimmed interest rates by 0.25% in the quarter as inflation remains well contained and growth anaemic.

The FTSE/JSE All Property Index produced a -4.2% total return in the third quarter, similar to the All Share Index (-4.6%) and better than general retailers (-7.8%). Performance was worse than the All Bond Index (+0.8%). News flow was challenging, with some sobering company results reported due to the weak economy.

Over the past 12 months, the broader All Property Index has returned -7.7% and the narrower old SAPY Index -2.7%. In comparison, the All Share Index returned +1.9%, the All Bond Index +11.5% and general retailers -12.8%. The gap between bonds and property performance is particularly noteworthy and shows how cheap property has become in comparison. The fund comfortably outperformed its benchmark before fees. Good domestic stockpicking was hurt by the performance of the UK majors.

The sector offers an attractive yield in excess of domestic bonds, but with little nominal short-term distribution growth and negative real growth. At the time of writing the All Property Index, with material offshore exposure, offered a high 9.6% forward dividend yield, above the 9.0% on the SA 10-year bond.

Conditions remain difficult with disappointing GDP growth, cost increases constraining net rental growth, and significant over-rentals on renewal in some pockets (especially in offices also faced with significant potential new supply and a paucity of new jobs to provide the necessary demand). There is material negative pressure on rentals on lease expires. Malls are facing a tougher environment, a key concern. There is too much retail and office space in some nodes, retail sales are weak, trading density is flat and tenants’ profitability is under pressure. An improvement in economic performance is required. Bond yields and economic prospects are the key short-term drivers of capital value volatility. Increased foreign exposure continues to change the make-up and risk factors of the sector.

The fund will continue to hold meaningful positions in a diversified selection of property shares we believe offer the most long-term value and positive outlook.

The fund aims to remain fully invested at all times to generate sustainable pre-tax income whilst growing the original capital invested.

The FTSE/JSE All Property Index provided a +1.5% total return in the second quarter. The All Bond Index returned +3.7%, FTSE/JSE All Share Index +3.9% and the general retail sector 4%.

The fund’s performance after fees was equivalent to the All Property benchmark over the quarter. Over 12 months, the performance of both the fund and benchmark remained behind other domestic assets following the sector’s de-rating last year.

The past quarter’s distributions were unusually large due to the timing of dividends from some of the fund’s larger holdings, in addition to the high yields on offer in the sector. Near-term aggregate weighted distribution growth should be positive, but below inflation. Some companies will be negative outliers.

The sector offers an attractive yield in excess of domestic bonds, but with little short-term growth. Results over the quarter reflected the tough economy with well below inflation rates on rental growth and negative reversion on lease expiries. Malls are facing a tougher environment, a key concern. There are too many retail spaces in some nodes, sales are weak, trading density is flat and tenants’ profitability is under pressure. An improvement in economic sentiment is required. Bond yields are the key short-term driver of capital value volatility.

Increased foreign exposure continues to change the make-up and risk factors of the sector.

The fund will continue to hold meaningful positions in a diversified selection of property shares we believe offer the most long-term value.