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