Risk management comes to fore on heightened volatility

As South Africans sat waiting for a resolution of the hostage situation with President Jacob Zuma, it was easy to miss a number of developments sweeping through our investment markets, none of them positive.

Despite some enthusiasm for SA generated by Cyril Ramaphosa’s ascent to power, we could not escape unscathed by the massive sell-off in US equity markets, which translated into a similar sell-off in South African equities.

We have become used to our savings generating consistently positive returns to the point of complacency. But now that central banks worldwide are withdrawing their supportive measures, such as low rates and massive injections of cash into their economies, we should expect the unexpected.

Quantitative easing was phase one of a massive global economic experiment. The withdrawal of liquidity will be phase two. One thing is certain: we must prepare for a lot more volatility. That means risk management becomes key when managing investments.

Apart from a general sell-off, we have seen the Resilient property group, which includes the Resilient, Fortress, Greenbay and Nepi Rockcastle companies, come under attack.

Long a darling of the listed property sector, the group stunned with consistent price appreciation and higher than sector average dividend yields. It enjoys the support of the largest property unit trusts in SA, features in the FTSE-JSE top 40 index and boasts the Public Investment Corporation as one of its largest investors.

On the other side of the battleground are certain hedge funds that decided to short” the shares.

Shorting is a strategy whereby asset managers can take a negative view on the prospect of a company and its share price, borrow shares from those who own them for a fee, sell those shares, wait for the price to drop, repurchase them at a lower price, thus making a profit, and return the shares to the original owners.

Not dissimilar to the Steinhoff situation, the shorting activity by hedge funds led to the share prices of Resilient group firms dropping by more than 25% in January alone.

Various allegations have been made by both parties against each other. The only thing for certain is that the Resilient group is unusual as far as listed property stocks are concerned. Apart from Nepi, its companies own little direct property. The firms do own shares in each other, as well as granting large unsecured loans to education trusts and employee share incentive schemes that in turn buy group company shares.

Given that the group receives scant rental income, it also raises money in the equity markets to fund a generous dividend policy.

Greenbay is more of a hedge fund than a listed company, with just over 12% of assets actually held in direct property, international companies and derivative instruments.

Given the large premiums at which the shares trade, apart from anything else management has a lot of explaining to do regarding its strategy. The outcome of the fight between traditional asset managers who support the group and hedge funds is uncertain, but it will be a battle to the death as a lot is at stake for both parties.

A lot is at stake for South African savers and banks too.

And finally Christo Wiese seems to have lost faith in Steinhoff International by reducing his 21% stake in the firm to just 6.2%. This is not good news for shareholders who have been expecting some share price recovery.

And so February is a month of waiting. We wait for Zuma to finally leave, we wait for the property sector battle to play itself out, we wait for a horrendous budget and its inevitable tax increases, and we hope for some respite from the loss in value of our savings.

QUANTITATIVE EASING WAS PHASE ONE OF A MASSIVE GLOBAL ECONOMIC EXPERIMENT. THE WITHDRAWAL OF LIQUIDITY WILL BE PHASE TWO