You're listening to Strictly Business Podcast
with Lindsay Williams.
For the first time since the COVID-19 pandemic,
major central banks,
including the US and South Africa,
are cutting interest rates.
With the global and local rate cutting cycle now firmly
underway,
what are the implications for the SA fixed income
investors?
With me now, Malcolm Charles, Portfolio Manager,
Fixed Income at 91 in Cape Town.
Before you answer that question, please, Malcolm,
let me just give a very,
very brief summary of what's happened in a very busy
time.
Yesterday, that's Wednesday, the U.S.
Federal Reserve cut interest rates by 50 basis
points.
A little bit of a surprise.
Bank of England, not a surprise.
They left interest rates unchanged.
Tell us what happened in South Africa on Thursday, please.
Yeah, a bit of good news in line with our expectations,
a 25 basis points cut.
So, yeah, joining the bandwagon.
of interest rate cuts that the Swiss actually started.
We've seen, you say,
Bank of England kept rates today,
but they cut at the last meeting.
And we're in that trend where we're going to see more
cuts from all the mentioned central bankers,
including ours.
So the outlook, broadly speaking,
is pretty positive and good
relief for economies.
Yes, broadly speaking, we'll come to that in a moment.
But what is the outlook for global and SA interest rates?
and inflation.
Of course,
it should really be inflation and global interest
rates.
What can we expect if inflation behaves itself?
I think you're going to see different sort of
outlooks across the regions.
The US, obviously, that's the big news.
The 50 basis points we got there,
we had an inflation scare earlier this year
in the first quarter,
beginning of second quarter that has dissipated,
but it hasn't yet.
So
Jay Powell was at pains to say that
The 50 was really just catch up that they should have
actually done 25 in July.
So now they just literally do July and August.
They're not panicking.
This is not like the COVID one where we're going to get 50,
50, 50.
He gave guidance that we can expect another 25 at
the next meeting and another 25 closer to
Christmas.
So another 50 basis points from the U.S.
this year.
The UK is a little bit more tricky.
Their inflation is a little bit more sticky,
and hence the pause this morning.
They're going to be very slow
with their cuts, so we expect another cut
later in the year from the Bank of England.
ECB has already cut twice,
so also going to be a little bit more
circumspect and prudent,
as they like to say in central
bank speak.
So...
Yes, we're in a cutting cycle,
but I think a conservative,
prudent cutting cycle,
but broad-based across most
economies.
Yeah,
I was just looking at the Bank of England statement and the inflation number,
which came out on Thursday morning,
2.2% for CPI.
But the core inflation was
3.6%.
Just as a quick aside,
is there a disparity between
CPI and core in South Africa or the US,
if you would?
In South Africa, thankfully,
our core inflation is very well behaved.
The forecast for next year that the SARB
actually put out is that their core inflation is actually lower
than
CPI for the next three years.
And more importantly,
forecast to be below the midpoint of 4.5.
So it's a very
encouraging outlook
for South Africa.
I would say.
Relative to targets,
we're probably a little bit better off than the
UK ECB and the US.
They're all tinkering
a little bit around their target or a
little bit above.
So I would say as far as central bankers go,
I think the SOB can be a little bit more comfortable than the other
central bankers.
Yes, indeed.
The South African CPI rate very
recently released came in.
just below the 3% to 6% midpoint,
came in at 4.4%.
And although many people might have said that with such a high
base, i.e.
around about 8%,
it could have been a 50 basis point move,
but nonetheless, it is very encouraging.
What are the implications for the South African economy?
Because many people say, Malcolm,
that the South African economy is less
interest rate sensitive,
and the consumer is less interest rate sensitive
than in other countries.
Would you agree with that?
I would because there's been quite a destruction
of the consumer in South Africa with lack of
employment, etc.
But I think we are seeing a slight tick up.
It's less, but it's not irrelevant.
So we are going to see benefit
across the board for the consumer.
And then, you know, throwing the two pot as well,
there's a little bit of extra cash there that will hopefully go
towards debt relief.
But some of it we know will go towards spending.
So net-net,
we expect a little uptick in consumer spending
and consumer activity in the economy.
Very good.
And that, of course,
impacts growth because we are very reliant on the
consumer in South Africa when it comes to GDP,
gross domestic product.
And what about the RAND?
The RAND has been behaving itself quite well recently.
I think the mistake is we all got into the habit of, you know,
the RAND was just this absolute dog of
a currency.
But, you know,
the mistake people make is they forget that on the flip side,
it was a hell of a strong dollar.
For the last 18 months or so,
the only trading town was the dollar.
It was probably the best performing economy in the world.
On top of that,
you had aggressive interest rate hikes from the Fed.
So the amount of money that flowed home
as such from investors around the world was incredible.
The growth in money market funds alone in the US
was about $2 trillion.
So
all of that
money flew there.
It meant that the dollar was in
demand and any other currency
underperformed.
Since then,
the dollar is obviously losing a little bit of shine.
Interest rates are going to be cut a little bit more aggressively from the Fed
than
from the Reserve Bank.
So our interest rate differential will improve.
So that alone will see stability in the currency.
So I think we must get used to a more stable
RAND dollar exchange rate for the quarters and months
ahead.
However...
I was looking at the terms of trade as well.
So that's the stuff that we export divided by the stuff that we
import.
Yes.
And we're back at 2021-22 levels when the
RAND was around
1625.
So, you know,
don't be surprised if you don't see a
stable to slightly firmer RAND over the next six
to nine months.
Gosh, that would be wonderful in many ways.
Stability, of course, being the key,
whether it's stronger or weaker,
stability very much the key.
The South African economy.
And with a backdrop of the government of national
unity, has it stabilized?
I've mentioned that word stable.
Has the economy stabilized and will it continue to do
so or even grow,
albeit at a modest pace?
Very good question, Lindsay.
And the quick answer is, yes,
we have seen improvement.
We've seen consumer confidence.
We've seen business confidence tick up.
All the early indicators are looking very
positive.
The engagements we have with various
industry leaders,
it's the most encouraged I can say that they've been in probably eight to ten
years.
When they look at the outlook and they look at the quality of
engagement with state-owned enterprises and with government
bodies, etc.
And we know that that all
leads to investment in the economy,
which we desperately need.
And the one example we saw...
If we get more reforms like we did with the electricity and the
solar, etc., that led to
70, 80 billion rand invested in the economy.
And load shedding, our joke is,
what is load shedding when it was becoming a way of
life?
So if we can see that across other sectors,
I think we'll see a tick up in growth.
So already the numbers that
people are forecasting are a lot better
than we've got used to.
But if we see a reform sort of
bonus on top of that,
we can see meaningful growth next year and the
year after.
Very encouraging.
Now you've got to put on your portfolio manager's hat.
And I must say, you're very bad at disguising your feelings,
Malcolm, because I can sense an enthusiasm
after what's happened in the last few hours in
South Africa.
What is the impact on SAE fixed income
investments?
I mean, for example, the positioning.
of the 91 Diversified Income Fund.
Yeah, Lindsay, so it's been a great three,
four months.
So we started the year like really on a bad
note.
There was political fears.
There was inflation fears globally.
And everything was like mucky and messy.
Since then, the stars have started aligning.
So the government and national unity are in place.
Good reforms, good momentum coming from that.
At the same time that inflation is coming down,
the same time interest rates are coming down.
So for the first time in 10 to 15 years,
South Africa is aligned with the global economic
cycle.
So it's not something I'm used to
in recent history, so it's really encouraging.
So the portfolio has been exceptionally well
positioned through the cycle.
Going forward, it's still good,
although quite a bit is in the price.
So we've taken a little bit of risk off, but we remain constructive.
So on the bond side, we remain overweight.
We've slightly reduced a
bit of it just in case there's a little bit of
nervousness around the rate cuts and
sort of questioning, has the Fed done too much?
But any sell-off, we will go back into the market.
But I reiterate,
we remain very constructive on the bond market
going forward.
On the credit side,
there's still a decent yield there.
albeit there's not much supply of it.
So we sit in sort of more neutral credit
at the moment.
And that's purely because the pricing is a little bit expensive.
Property, we remain constructive.
We like that.
And in light of our conversation earlier on the
rant, that's probably the least amount of dollars we've ever had.
We've got around 1.5% dollars,
just as a little bit of a hedge,
because we do know that we've got elections coming up
in the US.
There is that.
That uncertainty in the Middle East is a Russian-Ukraine war
that everyone seems to have forgotten about it.
So you need some sort of protection for a
global event.
But a constructive sort of outlook in the
portfolio will be taking a little bit of risk off in
the last couple of weeks.
Let's look forward a year.
Are you going to beat cash?
Yes.
I mean,
it's an interesting time.
But, you know,
the way we do it is we look at cash is going to be lower.
As of midnight tonight,
it drops 25% as we discussed.
November, it'll drop another 25%.
January, another 25%.
So your lovely cash returns are going to be a
little bit less sexy for a while
as we go into the cycle.
Our portfolio currently yielding about
10.10%, so comfortably above cash.
And with the outlook that we see for South Africa,
we're pretty confident that
Not only should we earn a decent
yield,
there's opportunity out there to actually
participate and get a little bit of capital uplift
in the six months to 12 months ahead.
Malcolm, your confidence is very evident.
Thank you so much for your time.
Malcolm Charles is a portfolio manager,
fixed income at 91 in Cape Town.
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Lindsay Williams and various contributors.
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