The final quarter of 2019 was positive for risk assets, resulting in good returns for the full year. Despite slower economic activity globally and the increased intensity of the trade war between the US and China, global equities marched steadily higher. The US Federal Reserve stepped in to arrest the slowdown, cutting rates by 0.75%, and progress on a trade resolution towards the end of the year helped lift equities nearly 24% in rand terms in 2019 with the US equity market leading the way. From a sector perspective, IT was the stand-out performer, while energy was the laggard.

Local equities caught the move higher in global equities in the fourth quarter, ending almost 7% higher for the calendar year. This was driven primarily by a strong performance from the platinum and gold sectors as precious metals moved higher. Other rand hedge counters contributed positively with double-digit returns, while many SA-facing names were under pressure. Although the economy remained weak, instances of stock-specific issues arose in the form of excessive debt levels and ESG matters. Despite the weak economy, persistent Eskom problems and growing downgrade risks, local bonds returned over 10% in 2019.
The local property sector returned a paltry 1.9% in the year, trailing other domestic assets.
The fund’s performance before fees has been satisfactory over the past 12 months, outperforming the benchmark. Looking forward, the sector offers an attractive yield, but with little nominal short-term distribution growth and negative real growth. At the time of writing, the benchmark, with material offshore exposure, offered a 9.7% forward dividend yield, above the 9% on the SA 10-year bond.

Local conditions continue to be challenging with cost increases constraining net rental growth and significant over-rentals on renewal in some pockets. There is too much retail and office space in some nodes; retail sales are weak; trading densities are flat; and tenants’ profitability is under pressure, requiring an improvement in economic activity.

Economic prospects and bond yields are the key short-term drivers of capital value volatility, while increased foreign exposure continues to change the profile 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.