Share prices around the world have been very volatile during the first half of 2010. All indices produced negative returns. The JSE also was down 4% with above usual volatility indicating uncertainty and a lack of confidence. SA listed property was the best performing asset class with a return of 9.5%. Leading asset management houses have reduced equity exposure substantially and moved a large portion of the assets into cash, earning the current low interest rates. They fear the possibility of a double-dip recession, as governments (particularly in the US, UK and Europe) reduce their stimulatory measures and are forced to adopt stricter austerity measures for their economies.
As an investor, this is not a satisfactory landscape to be looking at. There is talk by chartists of a ‘head and shoulder’ formation on a number of leading indexes with possible double-digit drops. The first-world economies are still facing uncertain times with problems continuing to surface. The cost of bail outs around the world must still be met by their taxpayers. Many international indices are making the same technical structure, looking as if they are topping out. Advisors are suggesting a ‘wait and see’ approach to the world’s stock markets.
The big profits have probably been made in the bond markets in the current cycle, with the formation of a positive yield curve. Local interest rates can not go much lower and eventually global and local inflation will pick up on the back of all the financial stimulation. Also the huge inflows of forex into SA have reversed for the first time since January 2009.
Where to now?
For South Africans it appears that local is lekker. As a result of the preparation for the World Cup, our infrastructure has been improved dramatically, putting in place a platform for growth. The OECD report on SA projects growth of 5% in 2011 and scope for another interest rate cut. It is also indicated that, despite Eskom and administered price increases, we should see inflation staying within the 3 – 6 % band until mid 2012. This will mean that short term interest rates should stay lower for longer.
SA is starting to be seen as a higher growth emerging market likely to benefit from its conservative fiscal policies and growing demand for its exports from China and India. Given that this higher growth had been discounted by the equity markets already, where do we find the next investment opportunity?
Value is starting to appear in the commercial property market. Cash-strapped owners are being forced to sell part of their portfolios. As a result of the banks current conservative lending policies, most buyers are unable to raise the higher deposits required or raise finance at all. This combination of factors has created an opportunity for genuine high net worth individuals to ‘cherry pick’ the best commercial properties on offer at very competitive prices and yields, underpinned by good leases.
In addition, the leasing market seems to have turned upwards in March 2010, according to Growthpoint (SA’s largest listed property fund) CEO, Norbert Sasse. From March, Growthpoint started acquiring good new tenants, particularly in their Cape developments. Once all surplus space has been mopped up, rentals will start running again, as very little new development is taking place, resulting in current investors getting a double whammy – capital growth as yields compress and higher rental growth than usual. Such is the commercial property cycle – the buying opportunity is now and surprisingly at a time of low interest rates, which can be fixed at these unusually low levels.
For futher information, contact John Witter on 021 425 8586.
