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

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Have a listen to these.

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Inflation, inflation targeting, interest
rates, central banks, tariffs,

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statisticians sacking,

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China VAT, New Fed chair in the quite near
future,

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New Fed FOMC member, even nearer than
that.

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Where will Malcolm Charles, Portfolio
Manager at 91, start with all these?

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Let's find out because Malcolm is on the
line now.

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So much going on, Malcolm.

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It must be quite fun for you.

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It's been an incredible, I'd say the last
two weeks of July and the first couple of

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days of August have been crazy.

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As you said, both locally and abroad.

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Central banks are very much in the mix and
that's what drives our markets.

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So we've had volatility, but we've also
had pretty...

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decent runs in our fixed income markets as
well, which has been obviously good for

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the funds and good for our clients.

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Well, let's start with that, because I
look at the South African 10-year bond,

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and it wasn't that long ago, maybe around
about three weeks,

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that it was flirting with a 10%.

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And after the interest rate cut in South
Africa and things that went on overseas,

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we came down close to 950.

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Great performance, Malcolm.

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Yeah, it was a fantastic run.

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I mean that If you look at the South
African bond market, it's given a return

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of over 8% on the year so far.

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And about almost just under 3% coming
through in July alone.

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So a soggy start, a very uncertain start
locally and globally.

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And then sort of focusing a little bit
more on the fundamentals and I suppose

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less on the politics.

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And a really great place to be investing
money so far this year.

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Yes, that hasn't always been the case.

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Now, let's have a look at inflation.

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Inflation is 3% on a CPI basis in South
Africa, the bottom of the 3% to 6% target

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band.

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Is that target band going to change?

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Is it going to be abandoned and something
else new put in?

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Because that's the talk.

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Yeah, so that was quite an interesting
development last week at the MPC meeting.

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So we've been expecting some sort of
movement, but we were expecting that more

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than likely.

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October mini-budget or even as late as
February next year.

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There's been a lot of talk probably for
about 18 months now, being driven

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predominantly by the Reserve Bank,

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wanting a lower target than the 3 to 6
band,

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because we stand out relative to all other
emerging markets where we're way above

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everyone else.

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And as we know, higher inflation just
means that your currency weakens over

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time, and it's not great for business.

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So it made sense.

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And then the Reserve Bank governor, he
didn't change the target.

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I think there's been a bit of confusion
there.

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He's decided to change the focus to the
bottom of the band, which is 3%.

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So we still officially got the 3 to 6
band.

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In 2016, 2017, he changed the focus from
6% to 4.5%.

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So I suppose this is the next iteration of
that.

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But it hasn't gone down that well with the
finance minister who...

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put out a statement that he was a little
bit grumpy about the wording and the

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timing, etc.

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So even S&P put a bit of a warning shot
out there saying you can't have a

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Reserve Bank and the National Treasury not
in agreement on policy.

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So I would say we're in a bit of a flux at
the moment,

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which is not great for the certainty of
monetary policy and the effectiveness of

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it.

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uh targeting the three percent i think
knowing lesecha canago through his deeds i

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would say that this rift

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will be sorted out quite quickly because
he's that sort of chap no very much he's

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been a national treasury

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himself so he knows how it works and i i
think it's a short-term sort of hiccup and

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you know the two will

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definitely find each other and i think
it'll be you know for the betterment of of

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the economy if we can get

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a lower target and they can settle on a
number that they're both happy with,

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but definitely lower than the four and a
half.

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And then we can move on from there.

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I can't say I'm overly worried.

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It just means that it's harder to get
credibility if there's a tiff going on.

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So I think the sooner they sort that out,
the better.

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Okay, let's go back to, let's stay local
and go back to the actual interest rate

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situation itself.

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25 basis points we've had recently to the
downside.

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Firstly, do you think there'll be any more
this year?

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And secondly, do you think that sort of 3%

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focus that you spoke of and that the
governor spoke of at the meeting, do you

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think it's realistic?

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Because some people are saying, well,
we're actually going towards 4% over the

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next six months or so.

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Yeah, I mean, it's an interesting
argument.

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I mean, I'm lucky enough.

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I was around when the original target was
in the early 2000s when they protested on

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3 to 6.

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And back then, inflation was 10 percent.

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And none of us believed it.

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And yet Tito Maweni managed to get it
below 6.

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And then when La Secha said we must get it
to 4.5.

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equally.

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No one really thought he could do it.

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So it is a stretched target.

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I think every time you move lower, it's
probably a little bit harder than the

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previous one.

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But the Saab has got a lot of credibility.

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I think it's a great MPC.

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It's a great governor.

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So if anyone can do it, it's them.

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And it's not an overnight success.

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I think three to four years is probably
the time frame that we've got to get our

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head around of them achieving that target.

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Okay, interest rates.

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Just quickly, your thoughts on that.

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Have we seen enough this year now to the
downside?

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I would say 90% we've probably done for
this year.

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If you think about it, we've had a lot of
stunning tailwinds, low oil price, firm

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rent,

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well-behaved food prices.

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Everything's sort of been going in our
favor.

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And we have seen the trough of inflation.

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So inflation is very cyclical.

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It dropped out below 3%.

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It's back at 3%.

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We expect it to tick up over the next
couple of months back towards the 4% sort

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of level.

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So unless there's another downside shock
in oil or much firmer RAND or something

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like that,

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unlikely to get another cut this year.

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We think it's very much the case of
probably down for 2025.

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If there is a chance of a cut, it's later.

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in 2026. Okay, let's get to the fun part
of the podcast now,

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and that is the overseas developments and
tariffs.

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With tariffs, I mean, Mr.

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Trump, in the last couple of days, has
said, okay, another 25%

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India because you're buying Russian oil.

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And I think they've bought an enormous
amount over, I don't know what this time

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period was,

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but I saw somewhere that it was £137
billion worth.

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of Russian oil.

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That could have been over a year.

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But anyway, a lot of oil is going from
Russia to India.

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They may be curtailing those purchases
somewhat officially.

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But anyway, this is an annoyed Trump.

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But the whole tariff story is an
astonishing one.

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Where did it come from, for goodness sake?

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And more importantly, what is it going to
do to the markets?

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Yeah, look, what it is going to do is
create uncertainty.

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And Unfortunately, there is no consistency
with Mr.

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Trump with regard to the tariffs.

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If it was just purely economics and it was
based on sound sort of decisions, that's

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one thing.

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But even when it comes to South Africa,
you've seen a bit of politics involved.

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You see now with Brazil, he's imposing
higher tariffs because he doesn't like the

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fact that they're going

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after Bolsonaro, the previous president
there.

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So it's that sort of uncertainty.

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And as you mentioned, on the India story.

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So at this stage, I don't think India will
blink.

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I think it's going to become quite a
reasonable fight there.

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So it's uncertain.

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I think it is going to hurt prices in
America,

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which bizarrely will lead to slightly more
persistent and higher inflation,

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which means that the Fed is going to
battle to cut rates, even though the jobs

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data is weak.

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And it's almost working against what Trump
wants.

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Trump wants aggressive rate cuts so that
he can see the economy boom and take

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credit for it.

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Yet his actions are actually going to slow
down the Fed from being able to cut.

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It's very interesting.

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On the subject of the Fed, here we go.

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More fun now.

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The new Fed chairman is coming up in the
next few months.

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And I think it will be a Trump.

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appointee, in other words, somebody that
is easy when it comes to monetary policy

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compared to Jerome Powell,

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who will be the outgoing chair.

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Then we've got the new FOMC member, a
woman that resigned because she disagreed

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with the chair,

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Jay Powell.

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And so we've got another political
appointment, probably.

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And this whole thing is the politicization
of an organization that should be

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completely

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isolated from such influences, I think.

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The whole market thinks that.

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And you do see every time he tweets about
Jay Powell, the market actually gets

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nervous.

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And I don't think it's a coincidence that
the dollar...

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has come under so much pressure while he's
been doing these things.

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It's definitely lost its luster because
people are losing a little bit of faith in

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the dollar,

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despite it being the reserve currency.

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If any other country did that, they'd be
called a banana republic.

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So it's unfortunate that he's picking
these fights.

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And the last thing you want is the reserve
bank or a Fed governor or whatever.

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that has not got credibility, that the
market doesn't trust,

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because then you can't issue your debt
because people are worried about future

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inflation

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and integrity of the central bank.

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So your currency and your bond market are
tethered to the integrity of your central

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banker,

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and they're so, so important.

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And if you think about the amount of debt
in that country, the last thing they can

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afford is to have.

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doubt about these central bankers.

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Exactly, or a run on the bonds.

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Now, talking about doubt and talking about
integrity, I mean, what about the

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integrity of economic data?

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For example, the statistician being sacked
from the Bureau of Labor Statistics, the

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BLS.

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That was an incredible story.

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Just after the latest jobs numbers came
out, she was given the sack because Mr.

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Trump said she was rigging the numbers for
her political leanings.

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I couldn't believe that, Malcolm.

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It's beyond comprehension.

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I mean, she was a public servant, just a
statistician quietly doing her work.

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And, you know, there are revisions to that
data all the time.

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I mean, it's a data point where they have
to bring the data out very quickly so that

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it's current.

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And then, you know, as they double check
the data and they get more replies over

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the next month,

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they can revise it too.

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to actually reflect reality.

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And sometimes the revisions are up,
sometimes they're down.

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And at the sort of turning point where
we're at now because of tariffs and

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uncertainty and everything like that,

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you are going to have big revisions.

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Unheard of for a president to fire because
he doesn't like the numbers.

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In an economy like America, you've had it
in, as I said,

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the non-republics in the past.

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And we all know what happens to those
economies in the long term.

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It's not sustainable.

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No, it's not sustainable.

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And what is not sustainable as well is the
continuation of that theme,

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because it could be it's the Bureau of
Labor Statistics one day,

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and then it could be the people that
collate the consumer price inflation

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numbers, for example.

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Maybe he doesn't like the fact that
inflation might go up, say, to 3%, to

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3.5%,

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something like that.

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He'll say.

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No, I don't like that at all.

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Let's shoot the messenger and get rid of a
couple of people in that department.

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And the politicization of economic data
continues.

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And the bond market and the dollar say,
whoa, we don't like this at all.

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We can't trust it.

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We have to stand back for a while or even
worse.

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You've seen that already with the...

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So America's still doing okay.

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Their stock market's at highs and
everything like that.

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But the dollar is a lot weaker than it was
this time last year.

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and The amount of capital invested in
America from outside sources has also

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diminished.

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People have decided that, hang on, there's
too much risk there, that American

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exceptionalism is not quite there.

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They are still good companies, so I'm
happy to put some of my money there, but I

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actually want to hedge some of my bets.

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And, you know, that money is not going to
charge back in while he's firing these

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individuals or potentially,

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you know, getting false information.

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information.

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If you can't trust the data, well, guess
what?

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You're just going to invest less in that
economy.

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And it's a slow sort of bleed that happens
for the currency and the bond market.

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And as I said right in the beginning,

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they can ill afford to have bond yields go
up too much higher with the amount of debt

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that they need to

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issue.

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Let's have a look at your current
positioning, given everything that we've

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just gone through.

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Yeah, so we've been very constructive and
we've...

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We built our position up.

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When we got the third budget eventually
passed in the country,

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it was a very good budget and we felt that
there was too much negative news priced in

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vis-a-vis politics,

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the GNU and negativity around that budget.

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So we started building duration in the
portfolio.

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We started adding listed property to the
portfolio and we even used the Liberation

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Day.

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opportunity to buy some offshore credit
because the spreads widen quite a bit.

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And then steadily through June and July,
we added further duration, especially the

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longer dated bonds.

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So the 15 and 20 year bonds, which I view
were exceptionally cheap.

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And, you know, those have all done very,
very well.

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They've outperformed the shorter dated
bonds.

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And as we mentioned right from the
beginning, bonds have rallied very, very

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nicely through July.

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And, you know, even now we remain
constructive.

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We think there's still a little bit more
downside in yields.

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Inflation is under control.

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Interest cash rates are a lot less
attractive now than a year ago.

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People are looking for that extra yield,

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and South African government bonds are
very attractive real yield still at these

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levels.

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So you and the team at 91 are quite
optimistic about the run into year end.

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Yes,

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I think we're well placed to continue just
squeezing

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a little bit of a return off the market,
earn a very good yield.

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And because, you know, you've always got
to decide if you sell an asset, you've got

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to decide what am I going to do with it?

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And do you want to sell some in around 10
percent and go into cash at seven?

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It doesn't make too much sense to me at
this stage, considering the upside

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potential of the bond market.

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Malcolm, thanks so much for your insight.

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Malcolm Charles is a portfolio manager at
91 in Cape Town.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams and

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various contributors.

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and do not reflect the policy, position,
or opinion of any other agency,

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00:16:30.071 --> 00:16:32.071
organization, employer,

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00:16:32.071 --> 00:16:34.251
or company associated with
StrictlyBusinessPodcast.com.

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Assumptions made on the analyses are not
reflective of the position of any other

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entity other than the speaker or the
author.

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And since we are critically thinking human
beings, these views are always subject to

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change, revision,

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and rethinking at any time.

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Please do not hold us to them in
perpetuity.