WEBVTT 1 00:00:00.372 --> 00:00:04.535 You're listening to Strictly Business Podcast with Lindsay Williams. 2 00:00:05.476 --> 00:00:09.919 Global bond markets have been generally cheered up in 2024 by two things, 3 00:00:10.199 --> 00:00:13.041 falling inflation and thus falling interest rates. 4 00:00:13.421 --> 00:00:16.823 And then came Donald Trump, the next president of the United States, 5 00:00:17.104 --> 00:00:21.046 campaigned on a lower inflationary environment to the United States. 6 00:00:21.326 --> 00:00:26.390 But the markets, after his confirmation as the next president, sort of took a 7 00:00:26.390 --> 00:00:26.449 different view. 8 00:00:26.470 --> 00:00:29.392 With me is Adam Furlan, portfolio manager at 91. 9 00:00:29.732 --> 00:00:30.473 in Cape Town. 10 00:00:31.213 --> 00:00:36.938 Quite a strange reaction from the market initially, but then when you delve into 11 00:00:36.938 --> 00:00:38.938 the details, not so strange, Adam. 12 00:00:38.938 --> 00:00:40.281 Yes, that's correct, Lindsay. 13 00:00:40.481 --> 00:00:45.265 And I think the most predominant standout move post, you know, 14 00:00:45.265 --> 00:00:48.707 the Donald Trump victory is the move in the US dollar. 15 00:00:49.048 --> 00:00:55.953 And the US dollar has appreciated against the G7 currencies as well as EMFX in quite 16 00:00:55.953 --> 00:00:57.953 a big move. 17 00:00:57.953 --> 00:00:58.535 The US dollar kind of has everything going for it at the moment. 18 00:00:58.595 --> 00:00:59.295 It has. 19 00:00:59.572 --> 00:01:04.173 higher yields, better interest rate differentials, as well as now, you know, 20 00:01:04.233 --> 00:01:09.435 the push on growth that the market is expecting as a result of, you know, the 21 00:01:09.435 --> 00:01:11.435 Republican sweep, 22 00:01:11.435 --> 00:01:14.776 Donald Trump doing deregulation, tax cuts, likely to buoy growth in that economy. 23 00:01:15.476 --> 00:01:18.597 Yes, I mean, let's go back to the very basic stuff that I understand. 24 00:01:18.917 --> 00:01:25.579 And that is that if interest rates are not going to fall as fast as many people have 25 00:01:25.579 --> 00:01:27.579 anticipated in 2024, 26 00:01:27.579 --> 00:01:28.100 going into 2025, and beyond. 27 00:01:28.380 --> 00:01:34.882 then the dollar strengthens because of the yield factor and therefore bond markets 28 00:01:34.882 --> 00:01:36.882 are under pressure. 29 00:01:36.882 --> 00:01:37.043 Is that too simplistic an argument? 30 00:01:38.503 --> 00:01:41.124 I think that is fair for the first order. 31 00:01:41.444 --> 00:01:45.806 And, you know, that is what has been happening in the markets more recently. 32 00:01:47.126 --> 00:01:51.968 The expectations of the Fed have repriced significantly in the front end. 33 00:01:52.848 --> 00:01:59.550 About 50 to 75 basis points of rate cuts have been taken out of market expectations 34 00:01:59.550 --> 00:02:01.550 over the 35 00:02:01.550 --> 00:02:03.550 coming year. 36 00:02:03.550 --> 00:02:05.952 And we had actually remarks from Fed Chair Powell overnight, 37 00:02:06.612 --> 00:02:08.572 firstly saying they don't need to be in a rush. 38 00:02:09.133 --> 00:02:13.754 You know, they expect inflation to return to target, but it's going to be a bumpy 39 00:02:13.754 --> 00:02:15.754 ride. 40 00:02:15.754 --> 00:02:21.216 Sort of, you know, reiterating that, you know, they may slow their easing cycle and 41 00:02:21.216 --> 00:02:21.456 not go. 42 00:02:21.576 --> 00:02:23.217 consecutively going forward. 43 00:02:23.818 --> 00:02:25.379 And, you know, furthermore, 44 00:02:25.459 --> 00:02:32.245 he continues to add that they will not try and preempt any fiscal policy changes 45 00:02:32.245 --> 00:02:34.245 ahead of 46 00:02:34.245 --> 00:02:36.245 time because it is too uncertain. 47 00:02:36.245 --> 00:02:36.989 And that's obviously a very dangerous game for a central bank to be playing. 48 00:02:37.129 --> 00:02:42.814 But ultimately, those rate cuts have come out of the US more than anywhere else. 49 00:02:43.294 --> 00:02:49.860 And that is making the dollar look far more an attractive currency to be holding 50 00:02:49.860 --> 00:02:51.860 relative to the rest of the world. 51 00:02:51.860 --> 00:02:57.044 Adding to that, you know, trade tariffs, the expectations of tariffs further 52 00:02:57.044 --> 00:02:59.044 increases, 53 00:02:59.044 --> 00:03:02.747 you know, the market's expectation that the dollar will be appreciating relative 54 00:03:02.747 --> 00:03:04.747 to emerging 55 00:03:04.747 --> 00:03:05.769 market currencies as well as G7 currencies. 56 00:03:06.149 --> 00:03:11.453 Now, I don't want to be disparaging about politicians, but there have been cases in 57 00:03:11.453 --> 00:03:13.453 the past, one or two maybe, 58 00:03:13.453 --> 00:03:15.875 where they haven't kept their pre-election promises. 59 00:03:16.135 --> 00:03:17.096 Is there any chance? 60 00:03:17.676 --> 00:03:24.159 that, for example, the new Trump administration will not initiate a broad 61 00:03:24.159 --> 00:03:26.159 round of tariff 62 00:03:26.159 --> 00:03:29.621 introduction and will not do some of the other things like massive across the board 63 00:03:29.621 --> 00:03:31.621 tax cuts, 64 00:03:31.621 --> 00:03:33.621 which will fuel demand in the economy. 65 00:03:33.621 --> 00:03:34.083 Is there any chance that it was just all bluster? 66 00:03:34.343 --> 00:03:36.384 Or do you think this time it's going to be a reality? 67 00:03:37.264 --> 00:03:39.985 I mean, I think you have to take him at his word. 68 00:03:40.105 --> 00:03:46.508 However, you know, what was initially proposed when he was in his campaign was, 69 00:03:46.508 --> 00:03:48.508 you know, 70 00:03:48.508 --> 00:03:51.690 60% blanket tariffs on Chinese goods, on all Chinese imports into the US, 71 00:03:52.070 --> 00:03:54.631 20% blanket tariffs on the rest of the world. 72 00:03:55.592 --> 00:03:58.393 That is likely not to pan out in that manner. 73 00:03:58.593 --> 00:04:00.394 We expect something a bit more targeted. 74 00:04:00.754 --> 00:04:06.917 Blanket tariffs would be extremely disruptive and not achieve essentially 75 00:04:06.917 --> 00:04:08.917 what he is trying to achieve. 76 00:04:08.917 --> 00:04:14.100 So we expect certain sectors, most likely vehicles, chip manufacturing, and 77 00:04:14.280 --> 00:04:17.242 probably a focus more on economies where the U.S. 78 00:04:17.302 --> 00:04:20.043 has a very significant trade deficit. 79 00:04:20.624 --> 00:04:23.245 And that is China, Europe and Mexico. 80 00:04:24.246 --> 00:04:29.729 So definitely probably a softer outcome than what has been promised. 81 00:04:29.869 --> 00:04:35.952 But we do think there will be significant shifts on the tariff front as well as on 82 00:04:35.952 --> 00:04:37.952 the tax front. 83 00:04:37.952 --> 00:04:39.174 You know, it is what he is aiming to deliver. 84 00:04:39.735 --> 00:04:41.796 And we expect now that he has control of. 85 00:04:42.284 --> 00:04:46.669 both the Senate and the House, we expect they will be able to deliver on those. 86 00:04:46.950 --> 00:04:53.838 Yes, he is all-conquering and all-powerful at the moment, and feeling very, very 87 00:04:53.838 --> 00:04:55.838 confident having seen various speeches recently. 88 00:04:55.838 --> 00:05:00.626 So let's say that the interest rate cycle is still in place, interest rate cutting 89 00:05:00.626 --> 00:05:02.626 cycle is still in place, 90 00:05:02.626 --> 00:05:03.229 but it's not going to be quite as aggressive as it might have been. 91 00:05:03.905 --> 00:05:04.626 pre-Trump. 92 00:05:05.066 --> 00:05:07.087 Now, the dollar will then remain firm. 93 00:05:07.588 --> 00:05:12.591 And what does that mean for emerging market currencies, particularly vulnerable 94 00:05:12.591 --> 00:05:14.591 ones? 95 00:05:14.591 --> 00:05:19.195 I mean, maybe even the South African RAND may come under pressure and also the 96 00:05:19.195 --> 00:05:21.195 ability of emerging market governments to service debt, 97 00:05:21.195 --> 00:05:26.160 because if interest rates don't come down, that means that their debt burden remains 98 00:05:26.160 --> 00:05:28.160 the same, or even gets worse, if heaven forbid, 99 00:05:28.160 --> 00:05:30.160 interest rates start to rise. 100 00:05:30.160 --> 00:05:32.625 Is there a risk to emerging markets because of Trumpflation? There is 101 00:05:32.625 --> 00:05:32.744 definitely 102 00:05:33.325 --> 00:05:38.989 risks that we do start to see inflation uptick as a result of certain Trump 103 00:05:38.989 --> 00:05:40.989 policies. 104 00:05:40.989 --> 00:05:45.494 But it is a double-edged sword because on the one hand, tariffs would be 105 00:05:45.494 --> 00:05:47.494 inflationary in some aspects, 106 00:05:47.494 --> 00:05:52.459 but the impact that they may have on global growth may actually offset the 107 00:05:52.459 --> 00:05:54.459 actual tariff on 108 00:05:54.459 --> 00:05:56.459 inflation. 109 00:05:56.459 --> 00:06:01.385 On the other hand, other policies that Trump is looking to implement, tax cuts, 110 00:06:01.385 --> 00:06:03.385 deregulation, are positive for global growth. 111 00:06:03.385 --> 00:06:08.049 And, you know, in that environment, as we've seen equity markets rallying quite 112 00:06:08.049 --> 00:06:10.049 strongly on the back of his win in 113 00:06:10.049 --> 00:06:11.851 that positive global growth environment, that's an environment that emerging 114 00:06:11.851 --> 00:06:13.851 markets actually like. 115 00:06:13.851 --> 00:06:18.535 So it is very much, you know, we think quite focused, particularly in South 116 00:06:18.535 --> 00:06:20.535 Africa, on, you know, 117 00:06:20.535 --> 00:06:20.656 what is happening to commodities? 118 00:06:21.136 --> 00:06:22.637 You know, what is the impact on China? 119 00:06:22.917 --> 00:06:29.321 How is China likely to respond to tariffs that are being put on on that economy? 120 00:06:30.017 --> 00:06:33.380 And, you know, as we've seen in this more recent move, 121 00:06:34.520 --> 00:06:40.965 whilst the move was most definitely driven by rate differentials, you know, the South 122 00:06:40.965 --> 00:06:42.965 African terms of trade have actually declined, 123 00:06:42.965 --> 00:06:44.267 you know, with softer commodities, softer precious metals. 124 00:06:46.829 --> 00:06:50.091 The currency has declined in line with its terms of trade move, 125 00:06:50.892 --> 00:06:54.274 which has been weaker since the outcome of the Trump election. 126 00:06:54.554 --> 00:06:58.057 So medium and long term is what you're saying is the way I interpret it is. 127 00:06:58.397 --> 00:07:03.921 that Trump's administration reigniting the US economy and thus the world's economy is 128 00:07:04.061 --> 00:07:09.626 good for countries like South Africa who are commodity producers because commodity 129 00:07:09.626 --> 00:07:11.626 demand is likely to go up. 130 00:07:11.626 --> 00:07:12.028 I wouldn't say outright good. 131 00:07:12.248 --> 00:07:18.253 It's very hard to determine at this stage what is going to be the driving factor, 132 00:07:18.253 --> 00:07:20.253 what will be the dominant force. 133 00:07:20.253 --> 00:07:23.597 Is it the tariff outcome, the isolationist sort of economic outcome that actually... 134 00:07:24.057 --> 00:07:29.859 is detrimental to emerging markets, or is it the growth side of the ledger that 135 00:07:29.859 --> 00:07:31.859 actually buoys global growth as a 136 00:07:31.859 --> 00:07:34.140 whole and actually offsets the negative impacts of tariffs on emerging markets? 137 00:07:34.500 --> 00:07:36.901 It is very tough to determine that at this stage, 138 00:07:36.981 --> 00:07:43.923 also given we don't know the magnitude of each side of each fiscal and tax change 139 00:07:43.923 --> 00:07:45.923 that will be made. 140 00:07:45.923 --> 00:07:49.324 But it is not necessarily, you know, completely negative for emerging markets, 141 00:07:50.204 --> 00:07:51.925 the policy that Trump will be implementing. 142 00:07:52.233 --> 00:07:57.977 Post-Trump, has 91 had a re-look at its investment strategy when it comes to 143 00:07:57.977 --> 00:07:59.977 bonds, to currencies, 144 00:07:59.977 --> 00:08:02.960 and also the impact of foreign direct investment in South Africa and other 145 00:08:02.960 --> 00:08:02.980 countries? 146 00:08:03.201 --> 00:08:08.784 Have you sat down and said, OK, this could happen, therefore we should do this, or 147 00:08:08.784 --> 00:08:10.784 should look to do it, 148 00:08:10.784 --> 00:08:11.186 should it come to fruition next year? 149 00:08:12.467 --> 00:08:13.468 Yeah, most definitely. 150 00:08:14.288 --> 00:08:21.053 We have sat down and thought about various scenarios of US policy changes. 151 00:08:21.841 --> 00:08:26.706 then looked at what that means for the Fed in particular, 152 00:08:26.966 --> 00:08:33.011 what is that likely to mean for the dollar emerging market currencies, 153 00:08:33.492 --> 00:08:36.374 and then assess within our portfolios, 154 00:08:36.835 --> 00:08:43.801 how can we position the portfolio to give us room to counteract moves that we think 155 00:08:43.801 --> 00:08:44.141 are 156 00:08:44.141 --> 00:08:44.522 quite extreme. 157 00:08:44.842 --> 00:08:47.785 So currently positioned relatively conservatively, 158 00:08:48.285 --> 00:08:53.648 and are waiting for better levels to actually add to fixed income assets in 159 00:08:53.648 --> 00:08:53.668 particular, 160 00:08:54.729 --> 00:08:58.511 because we see the market quite aggressively, 161 00:08:58.951 --> 00:09:03.413 the quite aggressive repricing out of fixed income assets that we've seen, 162 00:09:03.933 --> 00:09:06.175 we think is potentially slightly overdone. 163 00:09:06.435 --> 00:09:07.936 Adam, thank you very much for your analysis. 164 00:09:08.036 --> 00:09:11.538 Adam Furlan is a portfolio manager at 91 in Cape Town. 165 00:09:12.378 --> 00:09:17.701 The views and opinions expressed in these podcasts are those of Lindsay Williams and 166 00:09:17.701 --> 00:09:19.701 various contributors. 167 00:09:19.701 --> 00:09:23.826 and do not reflect the policy, position, or opinion of any other agency, 168 00:09:23.826 --> 00:09:25.826 organization, employer, 169 00:09:25.826 --> 00:09:28.010 or company associated with StrictlyBusinessPodcast.com. 170 00:09:28.490 --> 00:09:35.456 Assumptions made on the analyses are not reflective of the position of any other 171 00:09:35.456 --> 00:09:37.456 entity other than the speaker or the author. 172 00:09:37.456 --> 00:09:41.641 And since we are critically thinking human beings, these views are always subject to 173 00:09:41.641 --> 00:09:43.641 change, revision, 174 00:09:43.641 --> 00:09:43.783 and rethinking at any time. 175 00:09:44.084 --> 00:09:46.506 Please do not hold us to them in perpetuity.