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You're listening to Strictly Business
Podcast with Lindsay Williams.

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South Africa has been in the spotlight and
for two reasons, one intensely local, one

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intensely international.

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With me is Malcolm Charles, Portfolio
Manager at 91 in Cape Town, to discuss two

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events.

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The first one, Malcolm, is Budget 3.0 or
3.0.

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And I think one of the reasons that there
has been three attempts at the budget, or

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there were three attempts at the budget,
third time successful.

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is because of something called the GNU,
and that's the Government of National

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Unity.

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It wouldn't have happened without GNU, I
don't think.

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Yeah, and it would have been a bit of a
tragedy if we didn't have the GNU and a 2%

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VAT hike sort of snuck through, which I
don't think was that well considered.

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And if you look at the budget 3.0, we
haven't deviated a million miles from the

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first budget.

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No VAT increase, which is very good for
the economy long term.

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and we've still got a primary surplus,
which is a good thing.

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We've still got the spending reviews that
are going to be coming.

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So I would say it's not a bad outcome
considering the sort of mess of the first

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budget that we could have had.

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Yes, and given the resources at the
disposal of the Minister, I'd say this is

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a fiscally responsible budget and fairly
well received,

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again, given the circumstances.

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No, very much so.

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I'm all the pity that it took three
attempts, but I suppose that's a sign of

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the checks and balances that we have now.

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got, which I think is a good thing for
markets.

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It's a good thing for the economy and the
country.

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And yeah, and also, I think we also forget
how well SARS did.

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So, you know, some of the reason that
we've got a fiscally responsible budget in

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the third

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iteration is because SARS collected more
money than they thought they would.

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So their efficiency is a benefit in the
fiscus.

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And there's a good chance that that can
continue as well.

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So we could get our debt metrics.

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down a little bit quicker than are
budgeted for at the moment.

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Well, let's hope so.

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And let's hope that growth will allow SARS
to do even more of a job in the future.

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And let's get to that now.

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What did they say about growth?

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What did they say about budget deficits as
well?

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What were the metrics that came out of
Budget 3.0?

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Yeah, I think the important one is a
slight revision down on growth from 1.8 to

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just above one and a half,

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which we think is...

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Probably doable considering the tariffs
have been reversed a little bit or paused

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at

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least.

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And the one that I look at the most is the
debt to GDP.

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So that was going to stabilize around 75,
76 percent.

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Because the denominators come down a bit,
it's going to around 77 percent.

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So it's gone up a percent, which is around
an era when you're around about that

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stage.

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But the important thing is that it
stabilizes there this fiscal year.

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Then it's budgeted to start coming down
from next year.

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And the way they're doing that is with
budgeting for primary surpluses for the

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third one in a row.

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So we've had two in a row now, and we are
budgeted to continue that process,

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which is the only way you're going to
eventually get that number down.

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And that's the one that the rating
agencies look at, the foreign investors

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look at.

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We need to get that number into the 60s.
So the first port of call is to stabilize

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it.

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It looks like they're on the way to doing
it, and then in the years to come, we

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should see that slowly coming down.

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Forgive the general nature of the next
question,

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but while the budget doesn't seem to have
created any more glaring problems,

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has it solved any problems?

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I think it's shown that we're moving in
the right direction.

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And a few points to look at is quite a bit
of emphasis on spending review,

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which has been lacking for the last five
to ten years, to be quite honest.

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There's been very little willingness to
almost admit to projects that are not

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working.

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So at least this cabinet and Operation
Bulandlela will get these spending reviews

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done and almost

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outside of parliament.

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So it's not the ministers that can sit on
them.

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I think that's the first very positive
story, because if you have got a debt

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problem,

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the first you've got to do is look at your
budget and cut back your spending.

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The second positive news was the focus on
infrastructure spend.

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So just over a trillion rand is budgeted
for the next three years.

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Now, if we want growth, we have to invest
in the economy, invest into our roads,

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into our transportation,

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into our energy infrastructure.

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And that finally now is coming.

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So we're not cutting back from that and
sitting on our hands and hoping magically

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growth comes.

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We actually...

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investing in the broader economy.

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And that multiplier effect should start
coming through from as early as next year.

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Very good.

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Now, whether it be for good or for bad
reasons, whether it be reasons beyond

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South Africa's control and the authorities
control,

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the fact is that inflation, Malcolm, is
beautifully under control, I think, both

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at the CPI and PPI level.

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Fantastic.

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This is a lot of hard work by the various
governors, and I think the current

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governor, Lissete Kanyaga,

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can take a bow of being quite resolute on
fighting inflation and fighting inflation

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expectations and sitting at, what, 2.8%
and forecast to remain in the 3%

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for a good while yet.

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And average in the threes this year is a
job well done.

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And, you know, there is now scope to
start, you know,

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to continue cutting rates and yet still
keep inflation expectations on the lower

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end of the target.

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Yes, let's hope that rate wish of yours
does come to the fore, because as we know,

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Lesech Kanyaga is a fairly hawkish fellow.

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But as you say, well done to him and his
team.

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Now the international influence that we've
had recently.

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And it was the Trump meeting.

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Sarah Ramaphosa, the president of the
Republic of South Africa, went over to the

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White House to meet President Donald J.

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Trump.

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And I still can't work out myself whether
it was good or bad, whether it was some

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farcical dream,

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and eventually it's going to go away.

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But it's clearly not.

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What was your take out?

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I can't work it out, Malcolm.

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Yeah, I mean, it's a great question,
Lindsay.

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And, you know, I've obviously had a couple
of days to digest it and everything like

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that.

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And Okay, it was cringeworthy, to say the
least, that ambush was, I mean, no one's

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ever,

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I don't think any president's ever done
that to anyone in the world before, where

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you say dim the lights, it was a proper

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TV production.

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But I think in the cold light of dawn, you
know,

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the president and the ministers that were
with him kept their cool, and the golfers

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and the businessmen were there.

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I think put on a reasonable show for South
Africa.

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But the way I look at it is essentially
the president went into the Oval Office

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and took cuts for us.

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It's like he took all the punishment on
his shoulder.

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He was the one that was sort of ridiculed
a little bit in the Oval Office.

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But let's not forget, we got a trade
negotiation started thereafter.

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If you told me three weeks ago that we
were going to have a trade deal and a goer

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might be able to be salvaged,

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I would have laughed at you.

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I would have said we are the last country
that will even be entertained in

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Washington and discuss a trade deal.

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So if it means a little bit of
humiliation,

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a little bit of cringe TV to get a trade
deal started and hopefully

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signed in the next couple of weeks or
months.

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then I can live with that because what
that means for our export sector,

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what it means for growth is enormous.

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And just to put it in context, at the
height of the Liberation Day tariffs, our

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growth was expected.

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When we were going to get that 31% tariff,
and the whole world was going to get

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tariffs,

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our growth was expected to be less than 1%
in that environment if that had allowed to

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happen.

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That's why I think it was a better thing
for South Africa if we come out with a

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trade deal

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after that bizarre meeting.

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Yeah, let's hope that the bizarre meeting
is literally that and it was a moment in

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time for Trump because he does like to be

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in the limelight for all the sometimes
wrong reasons.

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And I think this time it was the wrong
reason.

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But behind the scenes, let's hope that the
trade deal in Ogoa goes well.

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We'll watch this space.

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What does it tell you about the health of
the government of national unity?

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What does it say to the world?

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It probably says, OK, we had a few
wobbles, but now we're nursing our way

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back to health.

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You know, like any sort of strange
marriage, you do have a little bit of a

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hiccup.

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We had quite a big one two, three months
ago.

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And I think both the smoothness of Budget
3.0 and

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this trip to Washington showed that Peace.

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There's renewed respect.

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There's renewed understanding of the power
that the different parties have.

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And I think it's a lot more functional
than it was.

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So once again, it's one of those things
where as horrible as it was when we were

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having the

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potential breakup of the GNU, I think the
GNU that's come out afterwards is a better

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animal.

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It's one that you will hopefully see the
politicians engage.

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behind closed doors a little bit more as
opposed to shut their soapboxes and hence,

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you know,

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deliver a little bit of a better service
to the country.

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Very good.

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Now let's apply all this to the markets.

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And if you could maybe give us a little
summary of what's happened in the fixed

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income market year to date in South
Africa.

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Sure.

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Nice and easy.

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It's been a crazy year.

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So the beginning of the year started with
a lot of promise.

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And then, obviously, as Trump's
inauguration drew closer in January,

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everyone got very, very scared.

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So you saw bonds sell off.

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You saw listed properties sell off.

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Everything in South Africa had a torrid
time.

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Bizarrely, what you did see is the RAND
actually behaving quite well.

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that was on the back of a very weak
dollar.

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So everything that we can invest in in our
funds, unfortunately, was going the wrong

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way.

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You can't make money when all your asset
classes are going down.

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So it was a very tough time, and we had to
maximize our income and protect in the

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portfolio, which we managed to do.

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Since the last month or so, we have seen a
bit of consolidation and a bit of

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calmness.

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We've seen bonds recovered a little bit.

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We've seen a list of problems.

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the property recover, and RAM continues to
be quite well behaved.

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So I would say it's taken us four or five
months for a little bit of better news in

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the market,

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and we are at a more constructive place
right now than we have been for the rest

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of the year.

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Okay, that sort of starts to lead into my
next question, and that is your

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positioning and your outlook.

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Maybe we should do the outlook first of
all before the positioning.

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I want your view.

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on rates, on growth for the remainder of
the year, and also then later on we'll

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throw in a round in inflation.

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But rates and growth, if you would, to
start with.

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Yeah, so growth's been tricky.

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It's had a couple of false starts.

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There are some green shoots in certain
economies.

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You've seen the construction sector report
that their order books are looking quite

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good.

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You've seen the logistics, little green
shoots coming out of there.

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there was

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The Citrus Growers Association reported
last week that their tonnages moved

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last month, were up 21% on last year.

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So albeit that it is a lower base, but you
are seeing these little improvements

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coming through.

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So growth, we think we can get around that
one and a half percent that Treasury's

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targeting,

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we think is realistic and you are going to
see an improvement on last year.

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Rates.

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We think that there's a rate cut coming.

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I mean, is it this week?

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Is it in July at the next meeting?

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00:12:40.220 --> 00:12:44.944
We're pretty certain it'll be one of those
and we actually favour it sooner rather

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00:12:44.944 --> 00:12:46.944
than later.

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00:12:46.944 --> 00:12:47.586
The round is very, very interesting
indeed.

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00:12:47.766 --> 00:12:50.989
Sometimes I wake up and I say, that's got
to be independent round strength.

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00:12:51.029 --> 00:12:53.110
Other times I say, no, it's because the
dollar's weak.

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00:12:53.411 --> 00:12:54.351
But strong it is.

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00:12:54.431 --> 00:12:55.272
Can it continue?

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00:12:55.292 --> 00:12:56.033
History says no.

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00:12:57.153 --> 00:12:57.853
Yes and no.

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00:12:57.853 --> 00:13:01.877
So let's not forget that oil is at
multi-year lows.

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00:13:01.978 --> 00:13:04.160
highs, not oil, gold.

248
00:13:04.860 --> 00:13:06.762
And things like platinum are doing okay.

249
00:13:07.422 --> 00:13:09.044
Oil is at multi-year lows.

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00:13:09.804 --> 00:13:12.827
So our exports are doing okay.

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00:13:13.767 --> 00:13:17.650
Agricultural exports are expected to be
pretty decent this year as well.

252
00:13:18.111 --> 00:13:21.974
And oil, our biggest import is at multi,
multi-year lows.

253
00:13:22.054 --> 00:13:28.599
So that alone supports our terms of trade
and will support the currency for a little

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00:13:28.599 --> 00:13:28.858
bit.

255
00:13:29.580 --> 00:13:32.456
And then on top of that, It depends on
what currency you look at.

256
00:13:32.476 --> 00:13:37.580
And I think we need to shift a little bit
and look at Rand, Euro, Rand, pound, etc.

257
00:13:37.940 --> 00:13:42.704
Because the Rand dollar almost gives us a
false sense of the strength.

258
00:13:43.564 --> 00:13:47.127
If you look at it against the other
currencies, we're a little bit stronger,

259
00:13:47.167 --> 00:13:51.250
but not nearly as strong as we appear
against the quite weak US dollar.

260
00:13:51.611 --> 00:13:52.311
Right.

261
00:13:52.451 --> 00:13:57.195
Now, you mentioned earlier on that you'd
had a tough time because every single

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00:13:57.195 --> 00:13:59.195
position that you had wasn't doing well.

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00:13:59.195 --> 00:13:59.317
It had been a torrid start to 2000.

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00:13:59.598 --> 00:14:00.339
and 25.

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00:14:00.379 --> 00:14:01.119
Where are you now?

266
00:14:01.239 --> 00:14:02.340
Where are you positioned?

267
00:14:02.600 --> 00:14:03.401
And what's your outlook?

268
00:14:04.602 --> 00:14:09.286
Yeah, so at the moment, we started to move
a little bit more constructive.

269
00:14:09.306 --> 00:14:11.527
So we've added a little bit of risk to the
portfolio.

270
00:14:12.208 --> 00:14:17.232
Our duration in the portfolio, we're above
neutral.

271
00:14:17.312 --> 00:14:22.876
So we've got a slight long position in the
portfolio, expecting that to do well for

272
00:14:22.876 --> 00:14:23.136
the fund.

273
00:14:23.136 --> 00:14:25.718
And over the next couple of weeks, we'll
probably add a little bit to that.

274
00:14:26.370 --> 00:14:27.950
Listed property, we're more neutral.

275
00:14:28.030 --> 00:14:31.490
It's come back quite nicely, and we've
taken a little bit of profit there.

276
00:14:32.150 --> 00:14:38.110
And in light of what I said about the
currency, the lowest we've been for a long

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00:14:38.110 --> 00:14:40.110
time in foreign currency.

278
00:14:40.110 --> 00:14:45.510
We only had like 3.5%, of which 2% of that
is in other emerging markets.

279
00:14:46.010 --> 00:14:51.330
So we do believe that the RAND will be
stable at least, if not a little bit

280
00:14:51.330 --> 00:14:53.330
stronger in the near term.

281
00:14:53.330 --> 00:14:56.221
And what we did do is when we had all the
volatility in the U.S.,

282
00:14:56.722 --> 00:15:01.986
we added a couple of percent to good
quality investment grade U.S.

283
00:15:02.106 --> 00:15:04.168
credit to the portfolio.

284
00:15:04.208 --> 00:15:09.292
So we're sitting with about 7% offshore
credit, about 50% local credit.

285
00:15:09.312 --> 00:15:14.676
So trying to maximize the yield of the
fund to give us a good overall yield.

286
00:15:15.136 --> 00:15:21.501
But equally, we think there's an
opportunity to make a little bit of

287
00:15:21.501 --> 00:15:23.501
capital gain with our allocation to bonds
and property.

288
00:15:23.501 --> 00:15:28.339
So a better second half of 2025 than the
first half for the diversified income fund

289
00:15:28.339 --> 00:15:30.339
is what you're cautiously saying, I think.

290
00:15:30.339 --> 00:15:32.339
Absolutely.

291
00:15:32.339 --> 00:15:35.232
Similar to last year as far as the bad
first half and a good second half.

292
00:15:35.412 --> 00:15:37.454
Malcolm, thanks very much for your
analysis and your time.

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00:15:37.455 --> 00:15:40.976
That's Malcolm Charles, Portfolio Manager
at 91 in Cape Town.

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podcasts are those of Lindsay Williams and

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00:15:51.603 --> 00:15:53.346
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beings, these views are always subject to

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