Market Commentary 23 April 2018
Following a robust end to 2017, 1Q18 was characterised by significant volatility in equity markets, both domestically and offshore. The principal driver of this has been rising bond yields, pressuring equity valuations via higher discount rates. Growing concerns over a more protectionist approach from the Trump administration also weighed on equity markets. The pressure on valuation multiples associated with normalising interest rates has been felt most acutely in “yield proxies” such as British American Tobacco (down 16% in 1Q18) and AB InBev, which played a part in holding back returns on the JSE, while the strong rand (+4% during the quarter) proved a continued headwind to the sizeable rand-hedge component of the local market. Most notably for the JSE, listed property was a big drag, while Naspers’ discount continued to widen sharply. The Capped SWIX Index ended the quarter down by 5% on a total return basis, with Naspers and the Resilient group of companies (property) accounting for ~60% of the decline.
The SA-listed property sector is highly bifurcated and demonstrates that passive investment is a bad strategy in this particular sector locally. Despite modest gains from “domestic” bellwether stocks such as Growthpoint (we hold an overweight in our equity mandates) – the Property Index was held back by steep losses from the Resilient Group of companies. This is due to a combination of very high starting valuations (in many cases 2x P/NAV), a business model which relied on continued capital raises at premiums to book value; and well-publicised corporate governance concerns over the economic merits of the Group’s cross-shareholding structures and associated intragroup share trading. Given how steep the losses have been in these shares (~45%-70% down in 1Q18), a detraction of close to 2% from the performance of the Capped SWIX during 1Q18 is perhaps unsurprising. Whilst share prices have begun to more closely reflect valuation reality, we believe corporate governance will continue to prove an overhang on these stocks for some time, hindering the Group’s ability to effect capital raises as in the past. Our positioning in listed property remains focussed on the large liquid counters which will benefit from a decline in the cost of capital in SA, notably Growthpoint and Redefine.