Al­ter­na­tives worth a look

The bond mar­ket, credit, listed prop­erty and pri­vate eq­uity have pos­si­bil­i­ties, writes Pe­dro van Gaalen

Financial Mail - Investors Monthly - - Investing In 2019 -

With ro­bust re­turns hard to come by over the past five years and low­ered real-re­turn ex­pec­ta­tions for the next five, Iain Anderson, head of in­vest­ments at Syg­nia As­set Man­age­ment, be­lieves in­vestors will in­creas­ingly need to look to non­tra­di­tional as­set classes such as credit to de­liver in­fla­tion-beat­ing re­turns with low lev­els of volatil­ity.

“We be­lieve this as­set class could con­tinue to pro­vide good risk-ad­justed re­turns in 2019. We feel the credit sec­tor would be re­silient in the face of an un­cer­tain elec­tion re­sult. But we are also acutely aware of the large flows of cap­i­tal that are com­ing into the sec­tor and re­duc­ing spreads.”

De­spite the pre­vail­ing chal­lenges, Hy­wel Ge­orge, di­rec­tor of in­vest­ments at Old Mu­tual In­vest­ment Group, be­lieves that 2019 may be a more pros­per­ous year than in­vestors ex­pect. “It will take time to re­build the eco­nomic dam­age caused in re­cent years, but clearer strate­gic di­rec­tion from gov­ern­ment af­ter the elec­tions should help sta­bilise the coun­try’s eco­nomic tra­jec­tory and sup­port do­mes­tic growth.”

While volatil­ity in global eq­uity mar­kets will re­main a fac­tor, when global in­vestors start to dif­fer­en­ti­ate the sig­nal from the noise com­ing from Brexit and US trade wars, Ge­orge be­lieves, op­por­tu­ni­ties will emerge in 2019 out­side lo­cal mar­kets. “Lo­cal gov­ern­ment bonds also look at­trac­tive, and will of­fer good yields, de­spite SOEs re­main­ing a source of dis­com­fort. We need to see progress in turn­ing these around, but in­vestors are now more ac­cli­mated to the as­so­ci­ated volatil­ity.”

War­ren In­gram from Galileo Cap­i­tal agrees that the bond mar­ket of­fers a fair mar­gin of safety for risk-averse in­vestors, de­liv­er­ing ac­cept­able re­turns on cash with a one-year hori­zon. “With av­er­age yields in the bond mar­ket at 9.5%, these in­vest­ments of­fer suit­able in­fla­tion-beat­ing re­turns.”

Chan­tal Marx, head of re­search at FNB Wealth and In­vest­ments, ex­pects rea­son­able re­turns from the prop­erty sec­tor over the next 12 months for those look­ing to out­per­form bonds but re­main with sta­ble op­tions. “For­ward prop­erty yields of 9.5% are above 10year gov­ern­ment bond yields, which sug­gests bet­ter value is emerg­ing. The sec­tor looks more at­trac­tive if one ad­justs the bond com­par­a­tive to a blended yield, fac­tor­ing in off­shore ex­po­sure where yields are lower. We no longer ex­pect a de­r­at­ing rel­a­tive to bond yields, which we re­gard as more or less fair.”

Anderson says Syg­nia is gen­er­ally neg­a­tive on the do­mes­tic listed prop­erty sec­tor. “We see ris­ing in­ter­est rates, de­creased oc­cu­pancy and over­in­vest­ment in the sec­tor, as well as gen­er­ally low lev­els of eco­nomic ac­tiv­ity, as sig­nif­i­cant risk fac­tors.”

How­ever, In­gram be­lieves the listed prop­erty sec­tor, which has been dec­i­mated, would of­fer good value if eco­nomic in­di­ca­tors turn pos­i­tive af­ter the elec­tions.

Ge­orge adds that pri­vate eq­uity can also be a vi­able al­ter­na­tive for 2019. “Global ev­i­dence sug­gests that pre­mium re­turns can be achieved from pri­vate as­sets, but in­vestors must re­main cog­nisant of the trade-off in terms of liq­uid­ity. Many top-per­form­ing pri­vate eq­uity in­vest­ments have a seven to 10-year hori­zon, but if in­vestors go in with their eyes open these in­vest­ments can make sense.”

El­don Beinart, CEO at Stonewood Cap­i­tal, sug­gests that in­vest­ing in busi­nesses that pro­vide al­ter­na­tive fund­ing plat­forms will of­fer good pri­vate eq­uity and debt in­vest­ment op­por­tu­ni­ties, as this sec­tor has ben­e­fited im­mensely from ma­jor banks’ tighter lend­ing cri­te­ria. “De­spite the eco­nomic slow­down, busi­nesses still re­quire fund­ing, though vanilla fi­nanciers aren’t as will­ing to lend in these con­di­tions. But pri­vate and listed al­ter­na­tive fund­ing plat­forms would of­fer op­por­tu­ni­ties to re­alise short- and long-term re­turns.”

Beinart also be­lieves there are op­por­tu­ni­ties in the off­shore pri­vate cap­i­tal sec­tor, par­tic­u­larly in op­er­a­tional real es­tate and pri­vate eq­uity. “With in­ter­est rate cy­cles on an up­ward tra­jec­tory in the US and pre­dic­tions that Europe will fol­low suit in 2019, in­vestors should be wary of gap-linked real es­tate such as re­tail and of­fice space.”

Stonewood be­lieves op­por­tu­ni­ties ex­ist in off­shore real es­tate where the as­set is un­der­pinned by op­er­a­tional com­pe­ten­cies, like ex­tend­ed­stay ac­com­mo­da­tion and health-care fa­cil­i­ties such as as­sisted liv­ing and nurs­ing homes, as in­vestors can lever­age the man­age­ment team and de­mo­graph­ics to drive growth, in­stead of re­ly­ing solely on cap­i­tal­i­sa­tion rates.

If in­vestors are plan­ning to take funds off­shore, In­gram sug­gests bench­mark­ing the rand-dol­lar ex­change rate to de­cide when to make the move. “We feel R13.50 to the dol­lar is fair value. If the rand is above that mark we sug­gest a con­ser­va­tive off­shore ap­proach. If the rand drops be­low that level we would ad­vise in­vestors to boost their off­shore ex­po­sure.”

War­ren In­gram … fair mar­gin of safety

Chan­tal Marx … bet­ter value emerg­ing

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