You're listening to Strictly Business Podcast with Lindsay Williams.
With monetary policy still evolving, economic growth uncertain, and
inflationary pressures remaining a concern,
the fixed income landscape remains complex.
Meanwhile, President Trump's second term could impact fixed income because some of
his policy
could be inflationary.
This evolving environment marked by central bank actions, interest rate cuts,
and economic uncertainty presents a compelling case.
for active asset management, particularly within fixed income.
But we need to look at where the opportunities lie and where should
investors tread carefully.
With me is Malcolm Charles, portfolio manager at 91 in Cape Town.
We've got to have a look at two countries, Malcolm, when it comes to interest rates
and inflation.
The US, obviously, but also South Africa.
Can we start with the US?
Because there's a backdrop of global risks, Russia, Ukraine, Middle East, trade
wars, China, and, of course...
President Trump.
So maybe you could give us a view on inflation and interest rates in the United
States.
Yeah, it's actually quite interesting because it's almost a tale of two
countries where six months ago,
everyone expected aggressive rate cuts across the globe and South Africa would
obviously then follow suit
with those.
And they've been a lot more muted.
So in the US, we've probably had our cuts.
The market is now priced out.
Jay Powell himself last week said he will need one of two things.
So either the job market has to weaken dramatically or inflation has to come down
quite dramatically for him to even
consider another rate cut.
So from expecting possibly another two cuts a couple of months ago,
I think we're going to be flatline in the US for the next couple of quarters.
South Africa, on the other hand, is an interesting story because our inflation is
completely under control.
So we're at the bottom of our range of the target band, no pressure whatsoever.
The new weights of inflation came in and actually looks very, very under control.
But having said that, you know, the governor is being a bit cautious, quite
rightly so,
with the volatility of the RAND that Geopower brings.
And, you know, same thing.
I think our rate cut.
I think we've got one more left this year, but not at the next meeting.
I think we're going to pause for a meeting or two.
And if we see some stability on the currency,
I think the Saab will be very happy to cut closer to the middle of the year or early
in the third quarter.
Yes, he has a reputation for being cautious.
And as you quite rightly said, it's appropriate that Lusatia Kanyaga has been
cautious over the years.
What about growth?
I think I've asked this question probably 150 times since I've been a broadcaster.
How do we get growth going in South Africa?
Well, the interesting thing you ask is that the outlook is probably the best it's
been for seven, eight years.
You know, we've had some reforms.
We've largely fixed ESCOM.
We're moving quite positively on Transnet.
You know, over the holidays, there was proper action from the minister and
making...
leeway for private companies to hire the locomotives and to run the lines.
And the whole fear factor of government doing that has disappeared.
And I think we should see a decent pickup in sort of movement of
stock on those lines, which we need to get our minerals to the ports and we need to
get them out.
So that's looking positive.
So, Sanrel themselves have allocated 53 billion.
billion in the last year of tenders to our roads and everything like that.
So there is movement in infrastructure for the first time in many, many years.
The general confidence on the GNU is still okay and it's improving.
Obviously, as with all things in this, I forget, it could be going a bit faster and
a bit more stronger,
but it is moving in the right direction.
And the forecast for growth this year, we're talking 1.7 to 2 percent.
The world bank.
put out last week.
So, you know, we're still shy of the 3%, but from where we were, bobbing around
half a percent for many, many years,
2% growth would be very welcome.
I sense optimism in your tone and your analysis, Malcolm.
Do you share that optimism when it comes to your RAND outlook?
Because it popped above 19 to the US dollar when Mr.
Trump made some noises towards South Africa, and those noises have since been
signed into executive order.
But what about the RAND?
Because it's...
It's behaving itself.
Yeah, it's actually surprised.
It seems to be it sells off on a Monday after an executive order or a tweet.
We had a complete wobble last Monday.
Got it, as you say, around 19.
Finished the week at 1840-odd.
This week, in early morning trade this morning, it spiked a little bit, but once
again, coming back again.
I think positioning is a little bit on our side.
Terms of trade are okay.
Gold price and everything like that looking good.
So the fundamentals for the RAND are there,
but we mustn't forget that we are in a very uncertain world.
As you mentioned, your preamble with Russia, Ukraine, still at war with the
Middle East uncertainty.
And President Trump signing quite a few executive orders affecting a lot of our
trading partners
and a lot of sort of friendly nations in Europe and everything like that,
which no one quite knows how to price that into risk.
We do know that the RAND is a risk asset.
But for now, behaving very, very well, to be quite honest, considering everything
that's thrown at us.
It's quite interesting.
I don't want to politicize this chat too much, but on Air Force One last night on
his way to the Super Bowl,
he came up with a tip for tariffs on aluminium steel and a few other things for
every country that
um sends steel to the united states of america 25 but anyway that's an aside
we've had the state of the nation
address what about the upcoming budget speech on
19th of february probably more important yeah no very very much more important i
mean the state of the nation had a lot of wonderful
things um But, you know, as with all of it, it's a lot of we will as opposed to we
have done.
And I think that that's the sort of focus that needs to change in the GNU.
Whereas the budget has been we have done.
And, you know, I keep reminding everyone, you know, even last year we had a primary
surplus ahead of elections.
You know, we had consolidation of debt.
We had consolidation of expenditure and actually cutting of expenditure.
So, you know, we're going to do a very, very good job there.
He remains, like the governor, conservative, trying to fix and do what is
right for South Africa.
And I think the budget next week is going to be more of the same, consolidating
debt.
The tax numbers are, from what we estimate,
slightly better than he had in the November mini-budget.
Not that he can have huge wriggle room, but I think there's a good chance that we
see further consolidation.
in our debt numbers, which will be welcomed by the bond market.
This is where I'm the most interested in this podcast now, Malcolm, and that's your
views and positioning with specific reference, if you would,
to the Diversified Income Fund at 91.
How are you positioned?
Yeah, so that is an interesting one because looking at our budget, looking at
our inflation,
looking at interest rates in South Africa, one would expect that you've got a lot of
risk in the portfolio.
Whereas actual fact at the moment, we're quite offensive.
We've reduced duration in the portfolio.
We've increased our FX exposure because we are a little bit nervous about
Sunday tweets and executive orders that spike the currency.
And we just think the protection in the portfolio, probably for the next month or
two,
is the order of the day.
And if you look six months, 12 months out, your yield on the portfolio is in excess
of 10%.
SA government bonds are giving you around 11%.
So it's an attractive asset class in the medium to long term.
But we just think being a little bit more conservative now,
a little bit protecting of the capital and the portfolio while we have this
barrage of...
tariffs and executive orders where the market tries to digest it is probably the
right way to handle it.
And then as we get into the second quarter,
we think some of the turbulence would have dissipated and then be in a much better
position in the portfolio.
And funny enough, it feels very much like last year.
Started the year a lot of fear, a lot of angst.
And then end of the year, the bonds gave you 17 odd percent return.
So, you know, I don't think it'll be as juicy this year,
but there's no reason why we can't earn the yield in the bond market over the
year.
But as I said, it'll be more middle of the year to the end of the year that most of
it comes through.
You excel the virtues of active asset management.
Just how active are you, Malcolm, briefly?
Yeah, so we've been a little bit more active this year than we have been.
probably for the last 18 months.
There was more of a trend in market at that time, whereas we learned from the
first Trump administration.
It is an up and down market.
So you don't typically get out of the range.
So it's quite range bound.
So you want to buy every time there's a little bit of a panic.
And then as the market calms down, digests the news, you're happy to sell a little
bit.
So we've been active on the duration.
We've been quite active on our property allocation.
And then on our FX allocation as well,
we're happy to be a little bit more active than we normally are.
But within the bounds of the way that we have run this portfolio in the previous
Trump era.
What about overweight and underweight?
Can you summarize those positions for us?
So, as I said, duration, we're underweight.
We're just over one year.
Very defensive at the very short end of the curve because we like to be where the
Reserve Bank is focusing.
We think that's where the value is.
Listed property had a terrible start of the year.
We've just added a little bit there.
So we.
We're probably a little bit overweight in listed property, just taking advantage of
that sharp sell-off.
And then FX, we're probably neutral to slightly long US dollars,
just protecting the portfolio from any craziness.
But as I said, the yield is still over 10%, very attractive.
In a world where cash is now at 7.5%,
so a pretty decent pickup from a yield perspective.
This is an unfair question.
It's my final question, and I won't hold you to it.
Just give us a general outlook for the returns that you might be expecting over
the next 12 months.
I think at least the yield of the portfolio should be achievable.
But I think with the active nature of the market conditions,
I don't think it's unreasonable to think that we can add a little bit of extra
capital to the portfolio.
Very good.
Malcolm, thank you very much for your time.
Malcolm Charles is a portfolio manager at 91 in Cape Town.
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