The past two weeks have been difficult ones for equity investors on the JSE. RSA Bonds, represented by the All Bond Index (ALBI) have however proved highly defensive. Recently listed property on the JSE has proved even more defensive against underperforming equities. As we show below the value of property this turbulent quarter has performed in line with bonds and significantly outperformed bonds in May and June to date.
The JSE Property Loan Stock (PLS) index has long proved to be significantly more sensitive to long term interest rates than to the equity market. Over the past three years every one percent move in the bond market has seen the PLS Index increase or decrease by about 1.6%. Every one per cent move in the JSE Top 40 Index has seen the PLS move on average by less than one half a per cent (0.5%) over the same period.
The recent strength in the bond market has been very helpful for the PLS index, as could have been expected on the basis of recent past performance. But forces fundamental to the property loan stock companies listed on the JSE have perhaps also been as helpful to property valuations. The dividends per share distributed by the PLS companies since the global financial crisis of 2008 compare more than well with the dividends per share paid by JSE listed companies generally. As we also show these dividends continue to keep pace with inflation.
And so holders of the PLS Index since 2008 have realised an initial dividend yield in line with that of long term interest rates, with inflation linked growth in dividends paid. An inflation protected yield of between seven and eight per cent is highly attractive and has been highly protective of the value of PLS stocks. Were investors confident that such inflation linked or beating distributions could continue, the initial yield on PLS stocks could be expected to fall significantly and the value of PLS stocks be expected to rise.