Listed property failed to continue in the same vein as the previous two quarters, ending the third quarter in the red, regardless of the fact that global bond yields bottoming out to historical lows. Local assets struggle to break out of the constraints of a stagnant economy, which has the marginal investor questioning the sector despite the attractive valuations.

For the first time this year, the ALPI (-4.2%) outperformed the SAPY (- 4.4%), owing in large parts to a rebound in Hammerson and Capital & Counties. Despite this, both property indices outperformed equities (- 4.6%), but trailed bonds (+0.8%) and cash (+1.8%); which largely reflects the risk-off trade playing out globally.

The market continues to balance the attractive valuations with the weak operating environment. A key positive remains the subdued global bond yields, which should spark a global search for yield. While local yields haven’t shown the same compression, they are remaining somewhat in check as the local economic indicators are doing little to justify a yield in the long bond below 10%. Another positive is that as results are reported, we continue to see several stocks re-basing and guiding a more realistic earnings trajectory. However the market is still bracing for what seems to be an inevitable Moodys downgrade and the resultant sell-off of bonds as they exit key indices. Even more prevalent is our President’s ability to implement any reasonable economic reform and in a reasonable time frame. The local economic data continues to subside, and all eyes remain on Eskom’s sustainability and the burden they have on the fiscus.

The UK still awaits a Brexit of any kind; however, we are seeing opportunistic interest in assets that have fallen significantly and believe that once certainty over the Brexit crystalizes, we are likely to see some stabilization in asset prices. CEE continues to defy the current global woes, with robust like-for-like earnings growth, which is further supported by accommodative monetary policy.

We are looking for high single digit total returns in the short term, which should edge slightly higher into the medium to long term, however this is very much at the mercy of the economic reforms proposed and implemented. The focus is on Eskom, their impact on the budget and ultimately where the long bond yield settles.