You're listening to Strictly Business Podcast with Lindsay Williams.
Welcome to this Cash Talk Podcast.
With me is Lisa McLeod from 91 in Cape Town.
Let's get straight into currencies, please.
Lisa, and the mighty rand, why has it been so mighty?
Hi, Lindsay.
Yeah, well, I think if you look year to date and you look at the rand versus the
dollar, we've actually appreciated around about
9% versus the dollar.
But if you look actually versus the euro, We've...
We've actually done the opposite.
We've actually depreciated by around sort of 2.4.
They're not necessarily poor performance versus the euro.
It's more or less in line with what we would have expected in terms of interest
rate differential.
So it's sort of performed as it should have.
But I guess my point is that it's mainly been a story of dollar weakness against
the RAND that's really driven the RAND
strength against the dollar this year.
On the other hand, I mean, I guess there are some...
positive factors that have filtered into the currency, despite the dollar weakness.
So if you look at the RAND against a basket of EM currencies, you've got to
take the beta into account.
But we have outperformed the last couple of months.
We've outperformed emerging market peers by around 2%.
And I think there are a couple of reasons for that.
I think there are a lot of positive fundamentals for South Africa.
We've got a prudent central bank.
we've generally been running higher real yields versus our peers.
Inflation is under control.
The outlook is positive.
I think the change in inflation targets also viewed as a positive one.
And then valuations in South Africa look attractive relative to
SAPers. And I think the last point I just wanted to make is in terms of trade.
That's really been quite strong.
You know, we've seen higher export prices, particularly in the precious metal side.
versus sort of lower oil prices on the import side.
And that's really been quite a positive factor in driving the rant.
And also the dollar is an incredibly important factor.
It's been weak.
It's showing signs of strength again.
But why was the initial weakness and where do you see it going?
Yes, if you look at from the start of this year, you know, the weakness in the start
of the year has really been a story of U.S.
growth underperformance.
You know, it's a relative story.
So U.S.
policy has been undermining growth versus the rest of the world, which was...
which was starting to pick up, you know, in terms of policy.
It was, you know, tied to fiscal policy.
It was tariffs.
It was immigration policy.
And I think that weakness became part of a broader narrative around the longer-term
flow.
So that circular decline of the dollar, the U.S.
exceptionalism, and, you know, I guess investors diversifying away from the U.S.
I mean, this is very much obviously a longer-term picture.
You know, it's a much, much longer sort of time horizon.
But if I would say from our perspective, we're actually a little bit more
constructive on the dollar in the shorter term.
And that's really on the back of sort of a pickup in sort of US growth momentum.
And then us becoming a little bit more concerned about other areas and growth,
such as Eurozone growth, etc.
But despite a little bit more constructive view on the dollar in the shorter term,
we still remain quite constructive on the RAND for all of the reasons I've just
chatted about.
What about the dollar and the US policy towards interest rates?
How does that sort of feed down to South Africa and also, of course, the South
African Reserve Bank?
And including that answer, if you would, Lisa, your inflation outlook?
Yeah, I mean, I think firstly, you know, in terms of the Fed, you know,
it's quite key in terms of what the Fed will do and how that sort of impacts sort
of our sob.
I think the government shutdown has meant...
You know, there's been a delay in the release of key economic data.
So it's made it a lot more complicated for Fed policymaking.
And also difficult for us as a market to kind of how do we interpret how will the
Fed react with a lack of data.
But in terms of what we're thinking, we're thinking two more cuts for the Fed this
year will likely materialize.
And, you know, I think next year, perhaps a little bit more has been priced than we
would have expected.
But in saying that.
I think we also have to be careful around the Lisa Cook case is coming up.
If we have a very different Fed composition, we could end up with a lot
more cuts next year.
So we need to watch a lot of these developments.
But how does that translate into the Saab?
I think a faith that does.
cut more, will give more room for the SARB to cut going forward.
But as long as the RAND stays strong and not too volatile.
In terms of inflation, you know, we've seen a lot of downside surprises in
inflation, particularly in August, you know,
that was driven by food prices.
And our outlook is benign.
You know, we've just actually lowered our forecasts further.
So we're looking for 3.3% for this year and 3.7% for next year.
So I think it does create a backdrop where we've got subdued inflation.
We've also got inflation expectations coming down lower.
It's a positive terms of trade and a stronger RAND.
These are all sort of stars that are aligning from a cyclical perspective.
And we think that the SAR will cut rates further from here.
Timing is a bit uncertain, but in the absence of a risk event,
I think we will get at least another 25.
bips and red cuts between now and let's say sort of the first quarter of next
year.
Okay, we've got currencies, we've got international influences, we've got
interest rates, inflation.
What does all this mean for portfolios?
What are the implications, please, Lisa?
I think in an environment where risk assets are not trading well, let's just
say that's the risk, I think even in that environment,
the short end of the curve will be somewhat protected from, you know, if you
have to compare it to the long end of the bond curve.
So I think with a view for further rate cuts down the line, we have continued to
selectively add duration to the portfolios.
We're always mindful that there could be better entry levels, given that there's a
fair amount priced into the market.
But we've just continued to sort of add duration to the portfolios when we see
opportunities.
Lisa, thank you very much for your time.
Lisa McLeod is a portfolio manager at 91 in Cape Town.
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