OFFSHORE SUPPLEMENT
30 September 2019
LESLEY-ANN MORGAN Multi-Asset Fund Manager, Schroders
IS THIS MARKET LOSING ITS MARBLES?
T
he chart that caught the eye of the Schroders Multi-Asset Investment team this month shows that the relationship between the ISM Manufacturing Purchasing Managers’ Index (PMI) and the S&P 500 index has broken down. The PMI is based on a survey of purchasing managers from more than 300 manufacturing firms. It is a widely followed and influential gauge of business confidence, as it incorporates new orders, production, employment, supplier deliveries and inventories. Typically, when the index is rising with improved business confidence, stocks climb. Conversely, when it is falling, the stock market follows suit. However, as the chart shows, business confidence has fallen in recent quarters. At the same time, the US stock market has rebounded to near all-time highs. What’s more, while equities (stocks) have risen, so too have bond prices. This is as investors anticipate that the US Federal Reserve will reverse its policy tightening and
begin to cut interest rates. An environment characterised by simultaneous strength in equity and bond markets is not sustainable. But as this long economic cycle is drawn out, can business confidence and economic growth return to support equities? Or have risk markets begun to lose their marbles? We on the Schroders Multi-Asset Investment team have a neutral stance on equities while we await greater clarity on how this macroeconomic picture plays out. We currently have a supportive view of bond markets given the reemergence of central bank support, weaker economic indicators and the persistence of political risks across various regions, which all support this defensive asset. It is important to note that Schroders does not provide advice and this should not be perceived as a recommendation to purchase or sell a particular stock or asset class. Past performance is not a guide to future performance and may not be repeated.
AN ENVIRONMENT CHARACTERISED BY SIMULTANEOUS STRENGTH IN EQUITY AND BOND MARKETS IS NOT SUSTAINABLE
Important Information: For professional investors and advisers only. The material is not suitable for retail clients. We define ‘professional investors’ as those who have the appropriate expertise and knowledge e.g. asset managers, distributors and financial intermediaries. Schroders Investment Management Ltd is an authorised financial services provider FSP No: 48998, registration number: 01893220
Source: Bloomberg to 31/07/2019
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SARAH STEADMAN Head: Wholesale Accounts, STANLIB
GLOBAL REITS STRETCH INVESTOR HORIZONS
D
espite the close to 50% international exposure in the JSE’s all-share index, South African investors continue to favour direct offshore assets, seeking even greater diversification than the JSE can offer. Amid the search for the best global opportunities, offshore real estate investment trusts (REITs) are a very attractive inclusion in a South African investment portfolio for various reasons, apart from the attractive income yield they offer. These range from the diverse characteristics of the global listed property environment to the particular benefits of accessing global REITs through unit trust structures. Global REITs offer South African investors far more comprehensive regional and sectoral property exposure than they can obtain locally. Some of the best REIT opportunities can be found in the US, Japan, Germany, Singapore and other markets. Global REITs tend to concentrate their portfolios in leading international cities such as New York, London, Paris, Berlin, Tokyo, Hong Kong and Sydney, where high land prices present a significant barrier to entry for small investors. There is also a wide variety of property sub-sectors and specialisations available in offshore markets, unlike the limited range available in SA. Offshore, the choice includes logistics, healthcare, self-storage, data centres, cellular towers, hotels & casinos, Specialty Health Care accommodation and more. The regional and sectoral depth of developed market REITs adds a significant layer of diversification to a South African investment portfolio. Global REITs are a great way to invest in specific, long-term secular growth trends – such as online business, mobile technology and demand for better healthcare for ageing populations – as well as to benefit from fast-evolving trends in the way societies live, work and shop. For example, the massive growing demand for digital and cloud infrastructure has led to the emergence of listed Data Centre REITs like Equinix & Digital Realty. These companies have adeptly positioned their portfolios to benefit from the increasing growth of global tech firms. With so much choice, identifying opportunities and embracing shifting trends can be difficult without the right expertise. Nicolas Lyle, Senior Analyst for the STANLIB Global Property fund, says it’s profitable to be able to take advantage of global sectoral trends by shifting allocation between sub-sectors and geographies. Over the past two years, the STANLIB Global Property Fund has shifted some of its US offshore retail focus to logistics and warehousing, in line with consumer retail trends towards online shopping. More recently, in the wake of political unrest in Hong Kong, the benefit of active management was evident in the fund’s down-weighting of the region in favour of other, more stable jurisdictions. REITs are exempt from corporate income tax, so income is only taxed in the hands of the end investor. However, there is an additional advantage to investing in an accumulating global property unit trust, since dividends are not distributed in the fund but are ‘rolled up’ into the unit price. Investors do not pay income tax on any distributions, only capital gains tax (CGT) on the final total return. REITs have both bond and equity characteristics. They earn attractive income, like bonds, but trade as equities, which entails additional risks. They complement a traditional mix of assets, giving investors uncorrelated, liquid access to stable income and competitive total returns.
