WEBVTT 1 00:00:00.372 --> 00:00:04.534 You're listening to Strictly Business Podcast with Lindsay Williams. 2 00:00:05.895 --> 00:00:12.118 With monetary policy still evolving, economic growth uncertain, and 3 00:00:12.118 --> 00:00:14.118 inflationary pressures remaining a concern, 4 00:00:14.118 --> 00:00:14.860 the fixed income landscape remains complex. 5 00:00:15.300 --> 00:00:20.123 Meanwhile, President Trump's second term could impact fixed income because some of 6 00:00:20.123 --> 00:00:20.162 his policy 7 00:00:20.583 --> 00:00:22.604 could be inflationary. 8 00:00:22.844 --> 00:00:29.488 This evolving environment marked by central bank actions, interest rate cuts, 9 00:00:29.488 --> 00:00:31.488 and economic uncertainty presents a compelling case. 10 00:00:31.488 --> 00:00:33.291 for active asset management, particularly within fixed income. 11 00:00:34.092 --> 00:00:39.316 But we need to look at where the opportunities lie and where should 12 00:00:39.316 --> 00:00:41.316 investors tread carefully. 13 00:00:41.316 --> 00:00:43.360 With me is Malcolm Charles, portfolio manager at 91 in Cape Town. 14 00:00:43.360 --> 00:00:47.423 We've got to have a look at two countries, Malcolm, when it comes to interest rates 15 00:00:47.423 --> 00:00:49.423 and inflation. 16 00:00:49.423 --> 00:00:50.025 The US, obviously, but also South Africa. 17 00:00:50.085 --> 00:00:51.146 Can we start with the US? 18 00:00:51.206 --> 00:00:57.532 Because there's a backdrop of global risks, Russia, Ukraine, Middle East, trade 19 00:00:57.532 --> 00:00:59.532 wars, China, and, of course... 20 00:00:59.532 --> 00:01:01.532 President Trump. 21 00:01:01.532 --> 00:01:03.217 So maybe you could give us a view on inflation and interest rates in the United 22 00:01:03.217 --> 00:01:05.217 States. 23 00:01:05.217 --> 00:01:10.443 Yeah, it's actually quite interesting because it's almost a tale of two 24 00:01:10.443 --> 00:01:12.443 countries where six months ago, 25 00:01:12.443 --> 00:01:17.048 everyone expected aggressive rate cuts across the globe and South Africa would 26 00:01:17.048 --> 00:01:19.048 obviously then follow suit 27 00:01:19.048 --> 00:01:21.048 with those. 28 00:01:21.048 --> 00:01:23.048 And they've been a lot more muted. 29 00:01:23.048 --> 00:01:25.048 So in the US, we've probably had our cuts. 30 00:01:25.048 --> 00:01:25.496 The market is now priced out. 31 00:01:26.412 --> 00:01:31.054 Jay Powell himself last week said he will need one of two things. 32 00:01:31.094 --> 00:01:38.056 So either the job market has to weaken dramatically or inflation has to come down 33 00:01:38.056 --> 00:01:40.056 quite dramatically for him to even 34 00:01:40.056 --> 00:01:42.056 consider another rate cut. 35 00:01:42.056 --> 00:01:45.698 So from expecting possibly another two cuts a couple of months ago, 36 00:01:46.218 --> 00:01:51.920 I think we're going to be flatline in the US for the next couple of quarters. 37 00:01:52.764 --> 00:01:57.727 South Africa, on the other hand, is an interesting story because our inflation is 38 00:01:57.727 --> 00:01:59.727 completely under control. 39 00:01:59.727 --> 00:02:04.331 So we're at the bottom of our range of the target band, no pressure whatsoever. 40 00:02:04.391 --> 00:02:08.673 The new weights of inflation came in and actually looks very, very under control. 41 00:02:09.414 --> 00:02:13.816 But having said that, you know, the governor is being a bit cautious, quite 42 00:02:13.816 --> 00:02:15.816 rightly so, 43 00:02:15.816 --> 00:02:16.538 with the volatility of the RAND that Geopower brings. 44 00:02:17.218 --> 00:02:18.979 And, you know, same thing. 45 00:02:19.259 --> 00:02:20.480 I think our rate cut. 46 00:02:21.140 --> 00:02:25.124 I think we've got one more left this year, but not at the next meeting. 47 00:02:25.184 --> 00:02:27.065 I think we're going to pause for a meeting or two. 48 00:02:28.226 --> 00:02:31.249 And if we see some stability on the currency, 49 00:02:32.250 --> 00:02:38.275 I think the Saab will be very happy to cut closer to the middle of the year or early 50 00:02:38.275 --> 00:02:40.275 in the third quarter. 51 00:02:40.275 --> 00:02:40.597 Yes, he has a reputation for being cautious. 52 00:02:40.597 --> 00:02:46.903 And as you quite rightly said, it's appropriate that Lusatia Kanyaga has been 53 00:02:46.903 --> 00:02:48.903 cautious over the years. 54 00:02:48.903 --> 00:02:50.903 What about growth? 55 00:02:50.903 --> 00:02:51.926 I think I've asked this question probably 150 times since I've been a broadcaster. 56 00:02:52.306 --> 00:02:54.147 How do we get growth going in South Africa? 57 00:02:55.488 --> 00:03:00.771 Well, the interesting thing you ask is that the outlook is probably the best it's 58 00:03:00.771 --> 00:03:02.771 been for seven, eight years. 59 00:03:02.771 --> 00:03:03.532 You know, we've had some reforms. 60 00:03:03.853 --> 00:03:06.294 We've largely fixed ESCOM. 61 00:03:06.954 --> 00:03:09.936 We're moving quite positively on Transnet. 62 00:03:10.716 --> 00:03:17.180 You know, over the holidays, there was proper action from the minister and 63 00:03:17.180 --> 00:03:19.180 making... 64 00:03:19.180 --> 00:03:23.265 leeway for private companies to hire the locomotives and to run the lines. 65 00:03:23.885 --> 00:03:29.270 And the whole fear factor of government doing that has disappeared. 66 00:03:29.710 --> 00:03:36.416 And I think we should see a decent pickup in sort of movement of 67 00:03:36.556 --> 00:03:41.220 stock on those lines, which we need to get our minerals to the ports and we need to 68 00:03:41.220 --> 00:03:41.279 get them out. 69 00:03:41.300 --> 00:03:43.121 So that's looking positive. 70 00:03:43.121 --> 00:03:46.544 So, Sanrel themselves have allocated 53 billion. 71 00:03:46.584 --> 00:03:50.746 billion in the last year of tenders to our roads and everything like that. 72 00:03:50.806 --> 00:03:55.189 So there is movement in infrastructure for the first time in many, many years. 73 00:03:55.949 --> 00:04:00.652 The general confidence on the GNU is still okay and it's improving. 74 00:04:01.712 --> 00:04:07.556 Obviously, as with all things in this, I forget, it could be going a bit faster and 75 00:04:07.556 --> 00:04:09.556 a bit more stronger, 76 00:04:09.556 --> 00:04:09.977 but it is moving in the right direction. 77 00:04:10.757 --> 00:04:15.100 And the forecast for growth this year, we're talking 1.7 to 2 percent. 78 00:04:15.120 --> 00:04:15.820 The world bank. 79 00:04:15.820 --> 00:04:16.440 put out last week. 80 00:04:16.480 --> 00:04:23.404 So, you know, we're still shy of the 3%, but from where we were, bobbing around 81 00:04:23.404 --> 00:04:25.404 half a percent for many, many years, 82 00:04:25.404 --> 00:04:26.026 2% growth would be very welcome. 83 00:04:26.186 --> 00:04:29.568 I sense optimism in your tone and your analysis, Malcolm. 84 00:04:29.908 --> 00:04:32.750 Do you share that optimism when it comes to your RAND outlook? 85 00:04:32.790 --> 00:04:35.951 Because it popped above 19 to the US dollar when Mr. 86 00:04:36.011 --> 00:04:42.195 Trump made some noises towards South Africa, and those noises have since been 87 00:04:42.195 --> 00:04:44.195 signed into executive order. 88 00:04:44.195 --> 00:04:46.195 But what about the RAND? 89 00:04:46.195 --> 00:04:48.195 Because it's... 90 00:04:48.195 --> 00:04:50.195 It's behaving itself. 91 00:04:50.195 --> 00:04:52.195 Yeah, it's actually surprised. 92 00:04:52.195 --> 00:04:54.440 It seems to be it sells off on a Monday after an executive order or a tweet. 93 00:04:56.461 --> 00:04:58.882 We had a complete wobble last Monday. 94 00:05:00.122 --> 00:05:01.623 Got it, as you say, around 19. 95 00:05:01.703 --> 00:05:04.004 Finished the week at 1840-odd. 96 00:05:06.068 --> 00:05:11.470 This week, in early morning trade this morning, it spiked a little bit, but once 97 00:05:11.470 --> 00:05:13.470 again, coming back again. 98 00:05:13.470 --> 00:05:16.292 I think positioning is a little bit on our side. 99 00:05:16.892 --> 00:05:18.072 Terms of trade are okay. 100 00:05:18.172 --> 00:05:19.993 Gold price and everything like that looking good. 101 00:05:20.053 --> 00:05:23.455 So the fundamentals for the RAND are there, 102 00:05:24.275 --> 00:05:29.197 but we mustn't forget that we are in a very uncertain world. 103 00:05:29.517 --> 00:05:33.839 As you mentioned, your preamble with Russia, Ukraine, still at war with the 104 00:05:33.839 --> 00:05:35.839 Middle East uncertainty. 105 00:05:35.839 --> 00:05:41.927 And President Trump signing quite a few executive orders affecting a lot of our 106 00:05:41.927 --> 00:05:43.927 trading partners 107 00:05:43.927 --> 00:05:46.770 and a lot of sort of friendly nations in Europe and everything like that, 108 00:05:46.830 --> 00:05:50.212 which no one quite knows how to price that into risk. 109 00:05:50.332 --> 00:05:52.533 We do know that the RAND is a risk asset. 110 00:05:53.113 --> 00:05:57.155 But for now, behaving very, very well, to be quite honest, considering everything 111 00:05:57.155 --> 00:05:59.155 that's thrown at us. 112 00:05:59.155 --> 00:06:01.155 It's quite interesting. 113 00:06:01.155 --> 00:06:03.319 I don't want to politicize this chat too much, but on Air Force One last night on 114 00:06:03.319 --> 00:06:05.319 his way to the Super Bowl, 115 00:06:05.319 --> 00:06:10.304 he came up with a tip for tariffs on aluminium steel and a few other things for 116 00:06:10.304 --> 00:06:12.304 every country that 117 00:06:12.304 --> 00:06:17.750 um sends steel to the united states of america 25 but anyway that's an aside 118 00:06:17.750 --> 00:06:19.750 we've had the state of the nation 119 00:06:19.750 --> 00:06:20.572 address what about the upcoming budget speech on 120 00:06:21.032 --> 00:06:27.477 19th of february probably more important yeah no very very much more important i 121 00:06:27.477 --> 00:06:29.477 mean the state of the nation had a lot of wonderful 122 00:06:29.477 --> 00:06:35.053 things um But, you know, as with all of it, it's a lot of we will as opposed to we 123 00:06:35.053 --> 00:06:37.053 have done. 124 00:06:37.053 --> 00:06:39.615 And I think that that's the sort of focus that needs to change in the GNU. 125 00:06:39.775 --> 00:06:42.136 Whereas the budget has been we have done. 126 00:06:42.396 --> 00:06:48.919 And, you know, I keep reminding everyone, you know, even last year we had a primary 127 00:06:48.919 --> 00:06:50.919 surplus ahead of elections. 128 00:06:50.919 --> 00:06:51.340 You know, we had consolidation of debt. 129 00:06:51.860 --> 00:06:55.521 We had consolidation of expenditure and actually cutting of expenditure. 130 00:06:55.561 --> 00:06:59.063 So, you know, we're going to do a very, very good job there. 131 00:06:59.955 --> 00:07:05.957 He remains, like the governor, conservative, trying to fix and do what is 132 00:07:05.957 --> 00:07:07.957 right for South Africa. 133 00:07:07.957 --> 00:07:11.799 And I think the budget next week is going to be more of the same, consolidating 134 00:07:11.799 --> 00:07:13.799 debt. 135 00:07:13.799 --> 00:07:15.100 The tax numbers are, from what we estimate, 136 00:07:15.680 --> 00:07:18.921 slightly better than he had in the November mini-budget. 137 00:07:20.341 --> 00:07:25.503 Not that he can have huge wriggle room, but I think there's a good chance that we 138 00:07:25.503 --> 00:07:27.503 see further consolidation. 139 00:07:27.503 --> 00:07:29.574 in our debt numbers, which will be welcomed by the bond market. 140 00:07:29.714 --> 00:07:36.600 This is where I'm the most interested in this podcast now, Malcolm, and that's your 141 00:07:36.600 --> 00:07:38.600 views and positioning with specific reference, if you would, 142 00:07:38.600 --> 00:07:40.603 to the Diversified Income Fund at 91. 143 00:07:40.983 --> 00:07:41.844 How are you positioned? 144 00:07:43.245 --> 00:07:49.470 Yeah, so that is an interesting one because looking at our budget, looking at 145 00:07:49.470 --> 00:07:51.470 our inflation, 146 00:07:51.470 --> 00:07:54.935 looking at interest rates in South Africa, one would expect that you've got a lot of 147 00:07:54.935 --> 00:07:56.935 risk in the portfolio. 148 00:07:56.935 --> 00:07:58.841 Whereas actual fact at the moment, we're quite offensive. 149 00:07:59.262 --> 00:08:02.444 We've reduced duration in the portfolio. 150 00:08:03.064 --> 00:08:09.669 We've increased our FX exposure because we are a little bit nervous about 151 00:08:11.470 --> 00:08:16.153 Sunday tweets and executive orders that spike the currency. 152 00:08:17.094 --> 00:08:22.518 And we just think the protection in the portfolio, probably for the next month or 153 00:08:22.518 --> 00:08:22.817 two, 154 00:08:23.118 --> 00:08:24.199 is the order of the day. 155 00:08:25.824 --> 00:08:31.948 And if you look six months, 12 months out, your yield on the portfolio is in excess 156 00:08:31.948 --> 00:08:33.948 of 10%. 157 00:08:33.948 --> 00:08:34.930 SA government bonds are giving you around 11%. 158 00:08:34.990 --> 00:08:40.174 So it's an attractive asset class in the medium to long term. 159 00:08:40.614 --> 00:08:44.017 But we just think being a little bit more conservative now, 160 00:08:44.037 --> 00:08:49.881 a little bit protecting of the capital and the portfolio while we have this 161 00:08:50.582 --> 00:08:51.602 barrage of... 162 00:08:52.363 --> 00:08:59.306 tariffs and executive orders where the market tries to digest it is probably the 163 00:08:59.306 --> 00:09:01.306 right way to handle it. 164 00:09:01.306 --> 00:09:01.427 And then as we get into the second quarter, 165 00:09:02.167 --> 00:09:08.489 we think some of the turbulence would have dissipated and then be in a much better 166 00:09:08.489 --> 00:09:10.489 position in the portfolio. 167 00:09:10.489 --> 00:09:13.311 And funny enough, it feels very much like last year. 168 00:09:14.532 --> 00:09:17.233 Started the year a lot of fear, a lot of angst. 169 00:09:17.913 --> 00:09:22.055 And then end of the year, the bonds gave you 17 odd percent return. 170 00:09:22.695 --> 00:09:26.438 So, you know, I don't think it'll be as juicy this year, 171 00:09:27.039 --> 00:09:33.905 but there's no reason why we can't earn the yield in the bond market over the 172 00:09:33.985 --> 00:09:34.685 year. 173 00:09:34.826 --> 00:09:40.550 But as I said, it'll be more middle of the year to the end of the year that most of 174 00:09:40.550 --> 00:09:42.550 it comes through. 175 00:09:42.550 --> 00:09:43.173 You excel the virtues of active asset management. 176 00:09:43.273 --> 00:09:45.054 Just how active are you, Malcolm, briefly? 177 00:09:46.115 --> 00:09:49.738 Yeah, so we've been a little bit more active this year than we have been. 178 00:09:50.599 --> 00:09:52.481 probably for the last 18 months. 179 00:09:53.461 --> 00:10:00.207 There was more of a trend in market at that time, whereas we learned from the 180 00:10:00.207 --> 00:10:02.207 first Trump administration. 181 00:10:02.207 --> 00:10:02.893 It is an up and down market. 182 00:10:02.933 --> 00:10:05.435 So you don't typically get out of the range. 183 00:10:05.435 --> 00:10:06.595 So it's quite range bound. 184 00:10:07.016 --> 00:10:09.718 So you want to buy every time there's a little bit of a panic. 185 00:10:10.178 --> 00:10:14.541 And then as the market calms down, digests the news, you're happy to sell a little 186 00:10:14.541 --> 00:10:14.921 bit. 187 00:10:14.921 --> 00:10:16.143 So we've been active on the duration. 188 00:10:16.223 --> 00:10:19.665 We've been quite active on our property allocation. 189 00:10:20.145 --> 00:10:23.408 And then on our FX allocation as well, 190 00:10:24.389 --> 00:10:27.351 we're happy to be a little bit more active than we normally are. 191 00:10:27.815 --> 00:10:33.477 But within the bounds of the way that we have run this portfolio in the previous 192 00:10:33.938 --> 00:10:35.018 Trump era. 193 00:10:35.758 --> 00:10:37.119 What about overweight and underweight? 194 00:10:37.399 --> 00:10:39.260 Can you summarize those positions for us? 195 00:10:40.200 --> 00:10:42.821 So, as I said, duration, we're underweight. 196 00:10:43.241 --> 00:10:44.442 We're just over one year. 197 00:10:44.582 --> 00:10:50.904 Very defensive at the very short end of the curve because we like to be where the 198 00:10:50.904 --> 00:10:52.904 Reserve Bank is focusing. 199 00:10:52.904 --> 00:10:54.904 We think that's where the value is. 200 00:10:54.904 --> 00:10:55.326 Listed property had a terrible start of the year. 201 00:10:55.326 --> 00:10:56.787 We've just added a little bit there. 202 00:10:56.787 --> 00:10:57.487 So we. 203 00:10:57.527 --> 00:11:03.229 We're probably a little bit overweight in listed property, just taking advantage of 204 00:11:03.229 --> 00:11:05.229 that sharp sell-off. 205 00:11:05.229 --> 00:11:08.371 And then FX, we're probably neutral to slightly long US dollars, 206 00:11:08.772 --> 00:11:12.133 just protecting the portfolio from any craziness. 207 00:11:12.153 --> 00:11:16.135 But as I said, the yield is still over 10%, very attractive. 208 00:11:16.615 --> 00:11:19.236 In a world where cash is now at 7.5%, 209 00:11:19.236 --> 00:11:23.638 so a pretty decent pickup from a yield perspective. 210 00:11:23.998 --> 00:11:24.998 This is an unfair question. 211 00:11:25.078 --> 00:11:27.139 It's my final question, and I won't hold you to it. 212 00:11:27.399 --> 00:11:32.243 Just give us a general outlook for the returns that you might be expecting over 213 00:11:32.243 --> 00:11:34.243 the next 12 months. 214 00:11:35.225 --> 00:11:42.170 I think at least the yield of the portfolio should be achievable. 215 00:11:42.790 --> 00:11:49.115 But I think with the active nature of the market conditions, 216 00:11:50.355 --> 00:11:55.259 I don't think it's unreasonable to think that we can add a little bit of extra 217 00:11:55.259 --> 00:11:57.259 capital to the portfolio. 218 00:11:57.259 --> 00:11:59.259 Very good. 219 00:11:59.259 --> 00:12:01.259 Malcolm, thank you very much for your time. 220 00:12:01.259 --> 00:12:01.654 Malcolm Charles is a portfolio manager at 91 in Cape Town. 221 00:12:03.255 --> 00:12:10.199 The views and opinions expressed in these podcasts are those of Lindsay Williams and 222 00:12:10.199 --> 00:12:12.199 various contributors and do not reflect the policy, 223 00:12:12.199 --> 00:12:13.941 position or opinion of any other agency, organisation, 224 00:12:14.261 --> 00:12:18.904 employer or company associated with StrictlyBusinessPodcast.com. 225 00:12:19.364 --> 00:12:24.327 Assumptions made on the analyses are not reflective of the position of any other 226 00:12:24.327 --> 00:12:24.447 entity. 227 00:12:24.687 --> 00:12:26.329 other than the speaker or the author. 228 00:12:26.610 --> 00:12:31.816 And since we are critically thinking human beings, these views are always subject to 229 00:12:31.816 --> 00:12:31.915 change, 230 00:12:32.096 --> 00:12:34.659 revision and rethinking at any time. 231 00:12:34.960 --> 00:12:37.383 Please do not hold us to them in perpetuity.