WEBVTT

1
00:00:00.380 --> 00:00:04.523
You're listening to Strictly Business
Podcast with Lindsay Williams.

2
00:00:05.586 --> 00:00:09.289
Developed market bonds are behaving, well,
not badly, that's the wrong word,

3
00:00:09.352 --> 00:00:13.594
but in some cases erratically and
different durations are in sharp focus for

4
00:00:13.594 --> 00:00:13.669
investors,

5
00:00:13.992 --> 00:00:16.422
particularly in the United States.

6
00:00:16.578 --> 00:00:17.734
But what about South Africa?

7
00:00:17.812 --> 00:00:22.016
With me is Ruan Naidoo, Portfolio Manager
at 91 in Cape Town.

8
00:00:22.516 --> 00:00:25.422
Is it too fanciful for me to say, Ruan,
that...

9
00:00:26.092 --> 00:00:30.317
Compared to developed market peers,
certain developed market peer markets

10
00:00:30.317 --> 00:00:32.317
anyway,

11
00:00:32.317 --> 00:00:35.864
the South African bond market is almost
like a safe haven and has been since early

12
00:00:35.864 --> 00:00:37.864
April.

13
00:00:37.864 --> 00:00:39.864
Good day, Lindsay.

14
00:00:39.864 --> 00:00:41.864
That's quite correct, actually.

15
00:00:41.864 --> 00:00:44.606
Developed market bonds have come under
considerable pressure in recent weeks,

16
00:00:45.168 --> 00:00:48.137
and particularly at the long end of the
curve.

17
00:00:48.887 --> 00:00:55.762
And I think the stress here has been
driven by mounting concerns over fiscal

18
00:00:55.762 --> 00:00:57.762
deficits and rising did.

19
00:00:57.762 --> 00:01:01.109
burdens, both France and the UK, as well
as

20
00:01:01.648 --> 00:01:04.371
Japan, have been grappling with budgetary
strains.

21
00:01:04.949 --> 00:01:09.894
And in Japan, you kind of see a bank that
is behind the curve on inflation.

22
00:01:10.636 --> 00:01:11.558
And as you point out,

23
00:01:12.386 --> 00:01:18.230
the US has not escaped this sharp
steepening in the yield curves and selling

24
00:01:18.230 --> 00:01:18.383
off.

25
00:01:18.652 --> 00:01:25.496
And that has largely reflected worries
about the Federal Reserve independence, as

26
00:01:25.496 --> 00:01:27.496
well as legal challenges surrounding turf.

27
00:01:27.496 --> 00:01:29.496
policy.

28
00:01:29.496 --> 00:01:31.496
And you're quite right.

29
00:01:31.496 --> 00:01:31.504
In contrast, South African government
bonds have been notably resilient.

30
00:01:32.246 --> 00:01:36.571
The long end of our yield curve has
outperformed the developed market

31
00:01:36.571 --> 00:01:38.571
counterparts.

32
00:01:38.571 --> 00:01:44.196
And that's really been supported by, I
think, our country's commitment to very

33
00:01:44.196 --> 00:01:46.196
orthodox economic policy.

34
00:01:46.196 --> 00:01:46.477
Yes, I saw that in the note that you sent
me,

35
00:01:46.680 --> 00:01:53.243
orthodox in terms of the actions of the
Treasury and the South African Reserve

36
00:01:53.243 --> 00:01:55.243
Bank or just the Reserve Bank.

37
00:01:55.243 --> 00:01:57.243
Tell us more, please.

38
00:01:57.243 --> 00:02:00.616
It is a combination of both monetary
policy and fiscal policy.

39
00:02:01.538 --> 00:02:07.460
The South African Reserve Bank has long
been regarded as fiercely independent,

40
00:02:07.702 --> 00:02:14.506
targeting inflation and committed to
bringing inflation expectations down over

41
00:02:14.506 --> 00:02:14.675
the long

42
00:02:14.675 --> 00:02:17.241
run in a very orthodox monetary policy
fashion.

43
00:02:18.647 --> 00:02:22.694
Most recently, the Reserve Bank has made a
decision

44
00:02:23.116 --> 00:02:27.177
to start focusing on the lower end of our
inflation target band.

45
00:02:27.236 --> 00:02:32.982
In 2017, they moved from focusing on the
top end of the band to four and a half.

46
00:02:33.201 --> 00:02:38.458
And this year, they've moved from four and
a half all the way down to focusing on a

47
00:02:38.458 --> 00:02:38.503
3%

48
00:02:38.763 --> 00:02:41.380
inflation target, so to speak.

49
00:02:42.224 --> 00:02:44.537
At the same time, if you look at our
national treasury,

50
00:02:45.037 --> 00:02:51.958
we've had successive years of a commitment
to fiscal consolidation, trying to get

51
00:02:51.958 --> 00:02:53.958
our...

52
00:02:53.958 --> 00:02:58.732
debt to GDP down over time by generating
primary surpluses within our

53
00:02:58.810 --> 00:02:59.510
budget.

54
00:03:00.455 --> 00:03:05.439
And this recent interaction between
National Treasury and the Reserve Bank,

55
00:03:05.759 --> 00:03:12.189
coming up with the joint statement last
week, speaking about a move to a lower

56
00:03:12.189 --> 00:03:14.189
target over time,

57
00:03:14.189 --> 00:03:15.580
has also bolstered investor confidence.

58
00:03:16.440 --> 00:03:17.140
Very good.

59
00:03:17.341 --> 00:03:21.224
There is a vulnerability, of course, and
the vulnerability comes from many

60
00:03:21.224 --> 00:03:23.224
quarters.

61
00:03:23.224 --> 00:03:25.224
It can be political.

62
00:03:25.224 --> 00:03:30.036
I mean, we had all the optimism of the
government of national unity, and then a

63
00:03:30.036 --> 00:03:32.036
few cracks started to appear,

64
00:03:32.036 --> 00:03:34.817
and that became apparent in the
performance of bonds and also equities.

65
00:03:35.505 --> 00:03:37.224
And there's also the RAND, of course.

66
00:03:37.239 --> 00:03:39.067
The RAND has been stoic.

67
00:03:39.099 --> 00:03:44.989
It's been very strong, certainly against
the US dollar, but that's mainly, I think,

68
00:03:44.989 --> 00:03:46.989
because of dollar weakness.

69
00:03:46.989 --> 00:03:48.989
But that can change.

70
00:03:48.989 --> 00:03:49.908
And a run on the RAND can mean a run on
the bond market, Rune.

71
00:03:51.990 --> 00:03:53.611
Yeah, this is quite right.

72
00:03:54.630 --> 00:03:57.435
Like, for example, within our diversified
income fund,

73
00:03:57.536 --> 00:04:03.286
we typically do use dollar RAND as a hedge
for our government bond duration in South

74
00:04:03.286 --> 00:04:03.424
Africa.

75
00:04:04.021 --> 00:04:10.115
What we found ourselves doing over the
course of this year is actually migrating

76
00:04:10.115 --> 00:04:12.115
some of that exposure to

77
00:04:12.115 --> 00:04:14.115
non-US domiciles.

78
00:04:14.115 --> 00:04:16.080
So we have been purchasing euro dollars,
for example,

79
00:04:16.859 --> 00:04:20.582
as a more appropriate hedge for a risk-off
situation in South Africa.

80
00:04:21.066 --> 00:04:25.910
And that's largely been because of the
bear market that we've seen in the dollar.

81
00:04:26.832 --> 00:04:29.449
There's been concerns about the end of
U.S.

82
00:04:29.512 --> 00:04:30.433
exceptionalism.

83
00:04:30.918 --> 00:04:32.902
But I think more importantly,

84
00:04:33.277 --> 00:04:39.918
it has been the deterioration of the
institutional integrity in the United

85
00:04:39.918 --> 00:04:41.918
States that has taken a rather

86
00:04:41.918 --> 00:04:43.918
shine off the dollar.

87
00:04:43.918 --> 00:04:47.451
So yes, South African bond markets will
remain susceptible to sell-offs in the

88
00:04:47.451 --> 00:04:47.467
currency.

89
00:04:48.130 --> 00:04:53.595
But as we sit here with precious metals
rallying quite aggressively,

90
00:04:54.134 --> 00:04:59.955
with the oil price coming off, terms of
trade is actually in the favor of South

91
00:04:59.955 --> 00:05:00.061
Africa.

92
00:05:00.811 --> 00:05:05.835
And moving to a lower inflation target
over time improves the purchasing power of

93
00:05:06.198 --> 00:05:11.362
South African rands and does add a bit to
the currency over time as well.

94
00:05:11.424 --> 00:05:18.151
So we think there are interesting supports
for dollar rand at this point or the rand

95
00:05:18.151 --> 00:05:20.151
in general.

96
00:05:20.151 --> 00:05:22.854
And that has led to some adjustments in
portfolio construction.

97
00:05:23.276 --> 00:05:28.714
It's very interesting you talk about, you
actually use the word integrity when it

98
00:05:28.714 --> 00:05:30.714
comes to the United States of America.

99
00:05:30.714 --> 00:05:35.109
and the august institutions of, for
example, the US Federal Reserve, the

100
00:05:35.109 --> 00:05:37.109
Bureau of Labor Statistics,

101
00:05:37.109 --> 00:05:39.070
and maybe next is the people that collate
the inflation data.

102
00:05:39.156 --> 00:05:44.054
Who knows what the administration in the
White House will target next?

103
00:05:44.375 --> 00:05:46.867
I don't see that going away, personally,
Ruan.

104
00:05:46.945 --> 00:05:53.086
So the dollar's, to me, not going to
embark on any period of strength quite

105
00:05:53.086 --> 00:05:53.192
soon.

106
00:05:54.211 --> 00:05:56.007
No, I don't think so.

107
00:05:56.476 --> 00:06:03.351
you could get sort of sharp pullbacks in
the dollar more broadly against other

108
00:06:03.351 --> 00:06:05.351
currencies.

109
00:06:05.351 --> 00:06:06.855
But I would put that down to short-term
position squaring.

110
00:06:07.355 --> 00:06:11.839
I think right now it is quite consensus to
have bearish dollar trades.

111
00:06:11.862 --> 00:06:17.511
And sometimes those positions get a bit
overcrowded and there's a short-term

112
00:06:17.511 --> 00:06:19.511
washout.

113
00:06:19.511 --> 00:06:23.511
But I would look for those as
opportunities to re-engage in bearish

114
00:06:23.511 --> 00:06:25.511
dollar trades.

115
00:06:25.511 --> 00:06:27.151
I think the Rubicon was really crossed
when...

116
00:06:27.907 --> 00:06:30.190
The president attempted to fire

117
00:06:30.850 --> 00:06:35.877
Governor Lisa Cook on the back of
potential mortgage fraud.

118
00:06:37.080 --> 00:06:43.971
I think that really did shake markets and
it certainly did shake my perception of

119
00:06:43.971 --> 00:06:45.971
the institutional integrity

120
00:06:45.971 --> 00:06:47.971
in the United States.

121
00:06:47.971 --> 00:06:50.893
Okay, so just to summarize the developed
market situation, well, the ones that

122
00:06:50.893 --> 00:06:52.893
we've spoken about, we've got

123
00:06:52.893 --> 00:06:53.940
France losing another prime minister.

124
00:06:54.948 --> 00:06:57.630
I think that's the fourth in a very short
space of time.

125
00:06:57.992 --> 00:07:00.632
Anyway, Japan has lost a prime minister.

126
00:07:01.253 --> 00:07:04.738
The United States are waiting keenly the
U.S.

127
00:07:04.800 --> 00:07:06.238
Federal Reserve decision.

128
00:07:06.277 --> 00:07:11.144
I think it's on September the 17th. And so
there's a lot of turmoil overseas.

129
00:07:11.238 --> 00:07:15.425
But meanwhile, as we pre-record this
podcast, the

130
00:07:16.081 --> 00:07:19.191
10-year South African bond is around about
9.50.

131
00:07:19.550 --> 00:07:23.910
And it was five months ago, Ruan, that it
was just above 11%.

132
00:07:24.127 --> 00:07:26.190
What a performance.

133
00:07:26.191 --> 00:07:31.613
Yes, it has been a phenomenal performance
in the South African government bond

134
00:07:31.613 --> 00:07:33.613
market.

135
00:07:33.613 --> 00:07:38.297
I mean, if we look at post-Liberation Day
moves, the R2035 bond,

136
00:07:38.298 --> 00:07:39.781
the 10-year bond in South Africa,

137
00:07:40.438 --> 00:07:45.985
has fallen in yield by over 150 basis
points over that period,

138
00:07:46.031 --> 00:07:47.610
which is just incredible.

139
00:07:48.266 --> 00:07:52.875
Over that same period, United States
10-year bonds have actually risen in

140
00:07:52.875 --> 00:07:53.122
yield.

141
00:07:53.575 --> 00:07:59.621
Same for Germany, same for the UK, same
for Japan, where 10-year bonds have risen

142
00:07:59.621 --> 00:07:59.739
by

143
00:08:00.183 --> 00:08:01.367
38 basis points.

144
00:08:01.383 --> 00:08:03.343
And if you look out to the 30-year sector,

145
00:08:03.906 --> 00:08:10.836
Japanese yields have actually risen by 98
points versus South African bonds going in

146
00:08:10.836 --> 00:08:12.836
the opposite

147
00:08:12.836 --> 00:08:14.601
direction, which is simply incredible for
a bond investor to witness.

148
00:08:15.101 --> 00:08:19.804
How does that affect your positioning for
the Diversified Income Fund?

149
00:08:19.820 --> 00:08:21.398
What's your strategy at the moment?

150
00:08:21.461 --> 00:08:22.883
How are you positioned, please?

151
00:08:24.055 --> 00:08:29.821
Yes, so we have been quite constructive on
South African government bonds over the

152
00:08:29.821 --> 00:08:31.821
course of this year,

153
00:08:31.821 --> 00:08:32.563
and we remain so right here.

154
00:08:33.102 --> 00:08:36.329
We think that the curve still has room to
flatten.

155
00:08:36.845 --> 00:08:42.118
There's still an excessive amount of risk
premia at the long end of our yield curve.

156
00:08:42.681 --> 00:08:47.259
And while we might be susceptible to
short-term steepening in developed

157
00:08:47.259 --> 00:08:49.259
markets,

158
00:08:49.259 --> 00:08:52.259
we will hedge for that from time to time
when those risks present themselves.

159
00:08:52.731 --> 00:08:58.776
But we do think with our yield curve
sitting at a spread of about 250 points

160
00:08:58.776 --> 00:09:00.776
between our

161
00:09:00.776 --> 00:09:06.104
30-year and our 10-year is simply the
steepest curve on planet Earth and bakes

162
00:09:06.104 --> 00:09:08.104
in a tremendous amount of

163
00:09:08.104 --> 00:09:12.557
risk premium that we think will come out
over time as this African government bond

164
00:09:12.557 --> 00:09:14.557
market is given the

165
00:09:14.557 --> 00:09:19.432
benefit of the conservative policy that we
have in both the fiscal and monetary

166
00:09:19.432 --> 00:09:21.432
space.

167
00:09:21.432 --> 00:09:23.432
Ruan, thanks so much for your time.

168
00:09:23.432 --> 00:09:24.785
Ruan Naidoo is a portfolio manager at 91
in Cape Town.

169
00:09:26.844 --> 00:09:33.809
The views and opinions expressed in these
podcasts are those of Lindsay Williams and

170
00:09:33.809 --> 00:09:35.809
various contributors and do not reflect
the policy,

171
00:09:35.809 --> 00:09:37.551
position or opinion of any other agency,
organisation,

172
00:09:37.864 --> 00:09:42.504
employer or company associated with
StrictlyBusinessPodcast.com.

173
00:09:42.973 --> 00:09:49.934
Assumptions made on the analyses are not
reflective of the position of any other

174
00:09:49.934 --> 00:09:51.934
entity other than the speaker or the
author.

175
00:09:51.934 --> 00:09:55.425
And since we are critically thinking human
beings, these views are always subject to

176
00:09:55.425 --> 00:09:55.525
change,

177
00:09:55.703 --> 00:09:58.269
revision and rethinking at any time.

178
00:09:58.566 --> 00:10:00.996
Please do not hold us to them in
perpetuity.