There are likely to be good chances to buy listed prop­erty on higher yields

Financial Mail - Investors Monthly - - Contents -

You can use volatil­ity to your ad­van­tage

In mid-2013 in this col­umn I dis­cussed the re­la­tion­ship be­tween the R186 gov­ern­ment bond yield and the JSE-listed prop­erty sec­tor. I high­lighted that bond yields had bro­ken higher and that the listed prop­erty sec­tor had bro­ken lower.

We have seen a very sim­i­lar sce­nario un­fold this year and the whole setup be­tween the two charts looks very sim­i­lar to how it looked in 2013. Bond yields move in­versely to price — when yields go up, bond prices fall and vice versa. Listed prop­erty tends to track the per­for­mance of the bond mar­ket closely, as listed prop­erty is also treated as an in­ter­est-bear­ing as­set to a cer­tain de­gree as there is a fair amount of track­ing be­tween prop­erty yields and the “risk-free” yields that can be ob­tained on gov­ern­ment bonds.

As was the case back in 2013, there was much spec­u­la­tion about the pos­si­bil­ity that US in­ter­est rates would start to in­crease and that was re­flected in a rise in US 10-year trea­sury yields. On that oc­ca­sion there was a global bond mar­ket sell-off and emerg­ing mar­ket bonds suf­fered the brunt of the selling pres­sure. The R186 gov­ern­ment bond yield went from 6,6% to 8,5% within three months and listed prop­erty suf­fered a sharp sell-off.

As it turned out, the mar­ket was an­tic­i­pat­ing a rise in US in­ter­est rates. Now, two years later, US rates have still not in­creased as the Fed­eral Re­serve has held its ac­com­moda­tive mon­e­tary stance. How­ever, we again find our­selves in a sit­u­a­tion where there is a great deal of spec­u­la­tion that US rates will start to in­crease be­fore the end of 2015 and US bond yields have be­gun to rise to re­flect that an­tic­i­pa­tion.

As be­fore, emerg­ing mar­ket bond mar­kets have again come un­der pres­sure fol­low­ing the rise in US yields and we have seen the yield on the R186 gov­ern­ment bond rise from 7% in Jan­uary to the cur­rent level of around 8,3%. Tech­ni­cally the break of the down­trend in the R186 yield in April through the 7,9% level is sig­nif­i­cant and points to fur­ther ris­ing in the yield.

There is also an in­verted head and shoul­der pat­tern ev­i­dent on the yield which projects up to a tar­get of 8,9%. That would equal the high­est yield that was achieved for the R186 in Jan­uary 2014. While this is the case in the bond mar­ket, it is not sur­pris­ing to see a marked de­te­ri­o­ra­tion in the per­for­mance of the JSE-listed prop­erty sec­tor. The sec­tor has bro­ken the up­trend that be­gan in early 2014. This hap­pened at around the same time as the yield on the R186 broke its trend. Given that the yields on SA gov­ern­ment bonds are a good in­di­ca­tion of what to ex­pect in the listed prop­erty space, the higher yield pro­jec­tion for the R186 gov­ern­ment bond is sug­ges­tive of fur­ther soft­en­ing in the prices of listed prop­erty on the JSE. The tech­ni­cal break weaker for the listed prop­erty sec­tor of the JSE in 2013 saw the sec­tor lag­ging for around a year af­ter the tech­ni­cal break. It would not be sur­pris­ing to see a sim­i­lar per­for­mance for listed prop­erty again in com­ing quar­ters. There is no rush to buy listed prop­erty while this is the case. Volatil­ity is likely to be with us for a while, as it was in 2013. Sig­nif­i­cant weak­ness in the listed prop­erty space will pro­vide in­come in­vestors with an op­por­tu­nity to buy listed prop­erty at a re­duced price and with a de­cent yield. Look to use this volatil­ity to your ad­van­tage in the com­ing quar­ters if you’re in the process of build­ing an in­come port­fo­lio be­cause there are likely to be some good op­por­tu­ni­ties to buy listed prop­erty on higher yields than what is cur­rently avail­able.

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