You're listening to Strictly Business Podcast with Lindsay Williams.
Have a listen to these.
Inflation, inflation targeting, interest rates, central banks, tariffs,
statisticians sacking,
China VAT, New Fed chair in the quite near future,
New Fed FOMC member, even nearer than that.
Where will Malcolm Charles, Portfolio Manager at 91, start with all these?
Let's find out because Malcolm is on the line now.
So much going on, Malcolm.
It must be quite fun for you.
It's been an incredible, I'd say the last two weeks of July and the first couple of
days of August have been crazy.
As you said, both locally and abroad.
Central banks are very much in the mix and that's what drives our markets.
So we've had volatility, but we've also had pretty...
decent runs in our fixed income markets as well, which has been obviously good for
the funds and good for our clients.
Well, let's start with that, because I look at the South African 10-year bond,
and it wasn't that long ago, maybe around about three weeks,
that it was flirting with a 10%.
And after the interest rate cut in South Africa and things that went on overseas,
we came down close to 950.
Great performance, Malcolm.
Yeah, it was a fantastic run.
I mean that If you look at the South African bond market, it's given a return
of over 8% on the year so far.
And about almost just under 3% coming through in July alone.
So a soggy start, a very uncertain start locally and globally.
And then sort of focusing a little bit more on the fundamentals and I suppose
less on the politics.
And a really great place to be investing money so far this year.
Yes, that hasn't always been the case.
Now, let's have a look at inflation.
Inflation is 3% on a CPI basis in South Africa, the bottom of the 3% to 6% target
band.
Is that target band going to change?
Is it going to be abandoned and something else new put in?
Because that's the talk.
Yeah, so that was quite an interesting development last week at the MPC meeting.
So we've been expecting some sort of movement, but we were expecting that more
than likely.
October mini-budget or even as late as February next year.
There's been a lot of talk probably for about 18 months now, being driven
predominantly by the Reserve Bank,
wanting a lower target than the 3 to 6 band,
because we stand out relative to all other emerging markets where we're way above
everyone else.
And as we know, higher inflation just means that your currency weakens over
time, and it's not great for business.
So it made sense.
And then the Reserve Bank governor, he didn't change the target.
I think there's been a bit of confusion there.
He's decided to change the focus to the bottom of the band, which is 3%.
So we still officially got the 3 to 6 band.
In 2016, 2017, he changed the focus from 6% to 4.5%.
So I suppose this is the next iteration of that.
But it hasn't gone down that well with the finance minister who...
put out a statement that he was a little bit grumpy about the wording and the
timing, etc.
So even S&P put a bit of a warning shot out there saying you can't have a
Reserve Bank and the National Treasury not in agreement on policy.
So I would say we're in a bit of a flux at the moment,
which is not great for the certainty of monetary policy and the effectiveness of
it.
uh targeting the three percent i think knowing lesecha canago through his deeds i
would say that this rift
will be sorted out quite quickly because he's that sort of chap no very much he's
been a national treasury
himself so he knows how it works and i i think it's a short-term sort of hiccup and
you know the two will
definitely find each other and i think it'll be you know for the betterment of of
the economy if we can get
a lower target and they can settle on a number that they're both happy with,
but definitely lower than the four and a half.
And then we can move on from there.
I can't say I'm overly worried.
It just means that it's harder to get credibility if there's a tiff going on.
So I think the sooner they sort that out, the better.
Okay, let's go back to, let's stay local and go back to the actual interest rate
situation itself.
25 basis points we've had recently to the downside.
Firstly, do you think there'll be any more this year?
And secondly, do you think that sort of 3%
focus that you spoke of and that the governor spoke of at the meeting, do you
think it's realistic?
Because some people are saying, well, we're actually going towards 4% over the
next six months or so.
Yeah, I mean, it's an interesting argument.
I mean, I'm lucky enough.
I was around when the original target was in the early 2000s when they protested on
3 to 6.
And back then, inflation was 10 percent.
And none of us believed it.
And yet Tito Maweni managed to get it below 6.
And then when La Secha said we must get it to 4.5.
equally.
No one really thought he could do it.
So it is a stretched target.
I think every time you move lower, it's probably a little bit harder than the
previous one.
But the Saab has got a lot of credibility.
I think it's a great MPC.
It's a great governor.
So if anyone can do it, it's them.
And it's not an overnight success.
I think three to four years is probably the time frame that we've got to get our
head around of them achieving that target.
Okay, interest rates.
Just quickly, your thoughts on that.
Have we seen enough this year now to the downside?
I would say 90% we've probably done for this year.
If you think about it, we've had a lot of stunning tailwinds, low oil price, firm
rent,
well-behaved food prices.
Everything's sort of been going in our favor.
And we have seen the trough of inflation.
So inflation is very cyclical.
It dropped out below 3%.
It's back at 3%.
We expect it to tick up over the next couple of months back towards the 4% sort
of level.
So unless there's another downside shock in oil or much firmer RAND or something
like that,
unlikely to get another cut this year.
We think it's very much the case of probably down for 2025.
If there is a chance of a cut, it's later.
in 2026. Okay, let's get to the fun part of the podcast now,
and that is the overseas developments and tariffs.
With tariffs, I mean, Mr.
Trump, in the last couple of days, has said, okay, another 25%
India because you're buying Russian oil.
And I think they've bought an enormous amount over, I don't know what this time
period was,
but I saw somewhere that it was £137 billion worth.
of Russian oil.
That could have been over a year.
But anyway, a lot of oil is going from Russia to India.
They may be curtailing those purchases somewhat officially.
But anyway, this is an annoyed Trump.
But the whole tariff story is an astonishing one.
Where did it come from, for goodness sake?
And more importantly, what is it going to do to the markets?
Yeah, look, what it is going to do is create uncertainty.
And Unfortunately, there is no consistency with Mr.
Trump with regard to the tariffs.
If it was just purely economics and it was based on sound sort of decisions, that's
one thing.
But even when it comes to South Africa, you've seen a bit of politics involved.
You see now with Brazil, he's imposing higher tariffs because he doesn't like the
fact that they're going
after Bolsonaro, the previous president there.
So it's that sort of uncertainty.
And as you mentioned, on the India story.
So at this stage, I don't think India will blink.
I think it's going to become quite a reasonable fight there.
So it's uncertain.
I think it is going to hurt prices in America,
which bizarrely will lead to slightly more persistent and higher inflation,
which means that the Fed is going to battle to cut rates, even though the jobs
data is weak.
And it's almost working against what Trump wants.
Trump wants aggressive rate cuts so that he can see the economy boom and take
credit for it.
Yet his actions are actually going to slow down the Fed from being able to cut.
It's very interesting.
On the subject of the Fed, here we go.
More fun now.
The new Fed chairman is coming up in the next few months.
And I think it will be a Trump.
appointee, in other words, somebody that is easy when it comes to monetary policy
compared to Jerome Powell,
who will be the outgoing chair.
Then we've got the new FOMC member, a woman that resigned because she disagreed
with the chair,
Jay Powell.
And so we've got another political appointment, probably.
And this whole thing is the politicization of an organization that should be
completely
isolated from such influences, I think.
The whole market thinks that.
And you do see every time he tweets about Jay Powell, the market actually gets
nervous.
And I don't think it's a coincidence that the dollar...
has come under so much pressure while he's been doing these things.
It's definitely lost its luster because people are losing a little bit of faith in
the dollar,
despite it being the reserve currency.
If any other country did that, they'd be called a banana republic.
So it's unfortunate that he's picking these fights.
And the last thing you want is the reserve bank or a Fed governor or whatever.
that has not got credibility, that the market doesn't trust,
because then you can't issue your debt because people are worried about future
inflation
and integrity of the central bank.
So your currency and your bond market are tethered to the integrity of your central
banker,
and they're so, so important.
And if you think about the amount of debt in that country, the last thing they can
afford is to have.
doubt about these central bankers.
Exactly, or a run on the bonds.
Now, talking about doubt and talking about integrity, I mean, what about the
integrity of economic data?
For example, the statistician being sacked from the Bureau of Labor Statistics, the
BLS.
That was an incredible story.
Just after the latest jobs numbers came out, she was given the sack because Mr.
Trump said she was rigging the numbers for her political leanings.
I couldn't believe that, Malcolm.
It's beyond comprehension.
I mean, she was a public servant, just a statistician quietly doing her work.
And, you know, there are revisions to that data all the time.
I mean, it's a data point where they have to bring the data out very quickly so that
it's current.
And then, you know, as they double check the data and they get more replies over
the next month,
they can revise it too.
to actually reflect reality.
And sometimes the revisions are up, sometimes they're down.
And at the sort of turning point where we're at now because of tariffs and
uncertainty and everything like that,
you are going to have big revisions.
Unheard of for a president to fire because he doesn't like the numbers.
In an economy like America, you've had it in, as I said,
the non-republics in the past.
And we all know what happens to those economies in the long term.
It's not sustainable.
No, it's not sustainable.
And what is not sustainable as well is the continuation of that theme,
because it could be it's the Bureau of Labor Statistics one day,
and then it could be the people that collate the consumer price inflation
numbers, for example.
Maybe he doesn't like the fact that inflation might go up, say, to 3%, to
3.5%,
something like that.
He'll say.
No, I don't like that at all.
Let's shoot the messenger and get rid of a couple of people in that department.
And the politicization of economic data continues.
And the bond market and the dollar say, whoa, we don't like this at all.
We can't trust it.
We have to stand back for a while or even worse.
You've seen that already with the...
So America's still doing okay.
Their stock market's at highs and everything like that.
But the dollar is a lot weaker than it was this time last year.
and The amount of capital invested in America from outside sources has also
diminished.
People have decided that, hang on, there's too much risk there, that American
exceptionalism is not quite there.
They are still good companies, so I'm happy to put some of my money there, but I
actually want to hedge some of my bets.
And, you know, that money is not going to charge back in while he's firing these
individuals or potentially,
you know, getting false information.
information.
If you can't trust the data, well, guess what?
You're just going to invest less in that economy.
And it's a slow sort of bleed that happens for the currency and the bond market.
And as I said right in the beginning,
they can ill afford to have bond yields go up too much higher with the amount of debt
that they need to
issue.
Let's have a look at your current positioning, given everything that we've
just gone through.
Yeah, so we've been very constructive and we've...
We built our position up.
When we got the third budget eventually passed in the country,
it was a very good budget and we felt that there was too much negative news priced in
vis-a-vis politics,
the GNU and negativity around that budget.
So we started building duration in the portfolio.
We started adding listed property to the portfolio and we even used the Liberation
Day.
opportunity to buy some offshore credit because the spreads widen quite a bit.
And then steadily through June and July, we added further duration, especially the
longer dated bonds.
So the 15 and 20 year bonds, which I view were exceptionally cheap.
And, you know, those have all done very, very well.
They've outperformed the shorter dated bonds.
And as we mentioned right from the beginning, bonds have rallied very, very
nicely through July.
And, you know, even now we remain constructive.
We think there's still a little bit more downside in yields.
Inflation is under control.
Interest cash rates are a lot less attractive now than a year ago.
People are looking for that extra yield,
and South African government bonds are very attractive real yield still at these
levels.
So you and the team at 91 are quite optimistic about the run into year end.
Yes,
I think we're well placed to continue just squeezing
a little bit of a return off the market, earn a very good yield.
And because, you know, you've always got to decide if you sell an asset, you've got
to decide what am I going to do with it?
And do you want to sell some in around 10 percent and go into cash at seven?
It doesn't make too much sense to me at this stage, considering the upside
potential of the bond market.
Malcolm, thanks so much for your insight.
Malcolm Charles is a portfolio manager at 91 in Cape Town.
The views and opinions expressed in these podcasts are those of Lindsay Williams and
various contributors.
and do not reflect the policy, position, or opinion of any other agency,
organization, employer,
or company associated with StrictlyBusinessPodcast.com.
Assumptions made on the analyses are not reflective of the position of any other
entity other than the speaker or the author.
And since we are critically thinking human beings, these views are always subject to
change, revision,
and rethinking at any time.
Please do not hold us to them in perpetuity.