26 Feb 2013
The current investment environment is characterised by economic uncertainty and in many instances fundamentally expensive asset classes, probably more so than before.
According to fund managers at Marriot Asset Management, the local investment landscape is complicated further by a choice of over 1 000 unit trusts, which proves difficult when making an informed investment decision as to where and what to invest in.
“In the face of weak fundamentals and demanding valuations, risky assets performed well in 2012 and the outlook remains uncertain.”
They point out that globally, governments continue to be faced with economic challenges that could have a profound impact on markets in the years ahead.
Economic growth in the developed world is largely dependent on printing money (quantitative easing) and maintaining artificially-low interest rates but this is not a positive outlook and investors need to be astute when investing their capital, they say.
With such uncertainty, an investment strategy based on macroeconomic forecasts is unlikely to produce predictable results
Factors that will impact on 2013 asset class performance include quantitative easing, austerity measures, artificially-low interest rates and the “fiscal cliff”, along with numerous other macro-economic variables, all of which are currently difficult to forecast with any degree of certainty.
“Investors looking for stable, growing returns should look to international equity markets and global real estate,” they say.
Given the economic environment that we have outlined, investors will be hard pressed to find adequate returns and yields.
“We believe that their best options lie with large, defensive first world equities and international real estate which are offering good potential returns and are currently well priced.”
Interest rates, listed property and equities
They note that interest rates will remain low and this has serious consequences for investors as it encourages them to adopt more risk than is appropriate, in pursuit of additional return.
Unlike many experts who predict a positive outlook for the listed property sector, the managers say South African fixed interest bonds and listed property yields remain at unreasonably low levels with the current low interest rate policy of central banks providing support for these asset classes.
“Factoring in a reasonable expectation of long-term inflation and using current yields, it is highly unlikely that these asset classes will provide investors with an acceptable real return over the longer term.”
However, they note that the South African listed equity drivers for valuations growth are in both earnings and dividends.
In recent years, despite tough economic conditions, earnings growth from South African companies has been impressive as a result of a combination of low interest rates, significant uptake of unsecured credit and wage increases well ahead of inflation.
Marriot believes the latter two drivers are unlikely to be sustainable over the longer term saying investors should expect below-average earnings growth from local equities in the years ahead.
“Current yields of approximately 3 percent combined with low growth prospects, makes South African equities expensive in our opinion.”
Sizwe Nxedlana, FNB chief economist says listed property saw strong growth in 2012 although it is becoming pricey and we are seeing a lot of listed property portfolios coming out.
He says people are scared of investing money in equities and see bonds as a safe haven pointing out that the next thing with better yields will be government bonds hence they are stronger in South Africa and foreigners seem to be buying lots of these.
As for the 2013 outlook, he doesn’t believe bonds will yield strong returns but insists now might be a good time to invest in property.
Adrian Saville, chief investment officer at Cannon Asset Managers notes that interest rates will remain low in 2013 but points out that government bonds are pricey with low yields when compared to inflation.
For investors looking to buy bonds, he says it is important to look at how much you pay.
Saville says some property unit trusts are priced to produce reasonable returns and expects property to do well - as long as interest rates remain low, growth is positive.
However, he warns investors to proceed with caution as the listed property sector has seen lots of stock coming through and so investors should do their homework on what it is they are buying.
Global real estate
Marriot says global real estate markets have recovered robustly since 2008/9 with the strongest players recapitalising their balance sheets and restoring dividends payments.
Currently, this asset class is offering investors fair yields with secure income growth prospects.
According to Mike Watters, managing director of Redefine International, despite the persistent weak economic outlook in the UK and Europe, investment market activity was stronger in the last quarter of 2012 with better quality assets receiving strong interest from the investment market.
Watters points out that rising inflation should raise rental levels increasing the value of the investment while rising interest rates will effect property’s capitalisation rates and reduce after interest income, causing the value of the investment to fall.
He says 2013 could be the buying opportunity of the century pointing out that as real estate recovers from the global financial crisis, it still can be acquired below its long-term normalised value.
“Interest rates are also at an all-time low but this won’t be for long so buying and fixing debt long-term will allow economic cyclical forces to work in one’s favour.”
Securing finance from banks remains a challenge and savvy investors should take advantage of this window and back management teams with the skills to take advantage of this tipping point in history, he says.
Marriot believes that based on current valuations, international fixed interest bonds should be excluded from an investor’s personal portfolio.
“Not only would this asset class reduce the prospect of income and capital growth but it would also reduce the portfolio’s income yield.”
They say first world equities continue to offer good value to investors.
Based on current valuations it is possible to invest in a portfolio of some of the largest and most recognisable companies in the world on a yield well in excess of the current yield of the Johannesburg Stock Exchange (JSE) All Share Index (ALSI).
Stock picks for 2013
Marriot says when buying stocks, selecting shares which generate reliable income streams and are resilient to unexpected events is likely to produce a more predictable outcome, to the benefit of the retired investor.
These companies tend to focus on basic necessities, enjoy global or countrywide distribution, have strong balance sheets and in many ways are distinctly independent of their home economy.
They say these companies' products are generally everyday necessities, with market dominance a function of their brand.
Saville chooses SA Corporate because of its attractive yields with quality assets of industrial properties.
Other 5 listed property stocks to buy into include Capital Property Fund, Rebosis Property Fund, Delta Property Fund, Vividend Income Fund and Hyprop Investments Limited as pointed out by STANLIB head of listed property funds, Keillen Ndlovu.
Nxedlana says he doesn’t look at stocks but at sectors saying domestic bonds look attractive to invest in as is property, but importantly points to defensive equities such as retailers and pharmaceuticals.
Some stocks in Marriot’s portfolio:
Proctor & Gamble
This company provides products that are used daily in homes around the world including Duracell batteries and Gillette.
Johnson & Johnson
A global manufacturer and distributor of pharmaceuticals, medical supplies and dozens of everyday brand name consumer products.
With over 8 000 brands, Nestlé probably owns more brands than any other company in the world.
Is the world’s second largest brewer, which bottles and distributes beer worldwide and owns many of the premium international brands.
Spar is South Africa’s third largest food retailer and with food being one of our most basic necessities, Spar has been able to pass on food price increases without sacrificing margins or turnover, and boasts an impressive dividend track record.
Has the largest retail pharmacy chain in South Africa with over 300 in-store dispensaries. Like food, pharmaceuticals are a basic necessity.
Marriot says offshore companies offer best value and based on current valuations it is possible to invest in a portfolio of some of the largest and most recognisable companies in the world on a yield well in excess of the current yield of the JSE ALSI.
With regard to local equity exposure, notwithstanding demanding valuations, choosing companies with predictable dividends will serve investors best and ensure the overall portfolio’s resilience to unexpected events, according to Marriot. – Denise Mhlanga
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