You're listening to Strictly Business Podcast with Lindsay Williams.
With me is Sumesh Chetty, Portfolio Manager at 91 in Cape Town and we're going
to talk about where to find
quality in 2026.
That'll be the core of our theme anyway and obviously we'll expand out from there,
Sumesh,
because 2025, having started the second quarter on a very,
very shaky footing...
It turned out to be the most splendid year, didn't it?
Absolutely incredible.
Yeah, Lindsay, thank you so much for having me.
But it wasn't really a year for quality if you think about what performed in 2025.
You know, specifically thinking about speculative companies overseas that were
very much in vogue,
think about the AI trade.
And then of course, locally, it's the precious and the other metal producers
that were running really hard.
So, not a wonderful year for quality managers.
But in spite of that, in absolute return terms, we deliver on all our promises to
clients.
It really was a little bit of a struggle though relative to some of let's call them
the more index focused managers.
Did you feel a little bit left out as the rest of the market ran away?
I mean, I'm always...
Actually, it was sort of there's a facetious element to that question.
But on the other hand, you do look at it and sort of gnash your teeth a little bit
and say, well, this When will the time be right for quality?
Because quality shines at different times, doesn't it?
No, of course.
As a portfolio manager, you always want to outperform all the time.
It doesn't matter what the market conditions are.
But realistically, that's never going to be the case.
So you do have to accept periods where your style,
your process is out of favor.
And unfortunately, 2025 was one of those years.
Okay, 2026 now, you might be looking at the...
Last few days of volatility.
Here we are pre-recording on Thursday the 21st. And the last few days of volatility,
when I say volatility,
I mean downside movements for certain asset classes.
You might be saying, right, now is the time where quality rises to the surface.
Is that what you're thinking?
Very bluntly, yes, quality will rise to the surface here.
But I think let me step back a little bit because, you know, the implication of me
saying yes suggests that quality didn't do well.
last year.
Quality did very well last year.
So if you think about the quality portfolios that we run and you think about
those pure quality
equities,
you had very high double-digit returns in dollars.
But ultimately what impacted you was that the market did slightly better because of
that AI trade,
as I mentioned.
So investors are always looking at this on a relative basis.
And that's why I said to you up front, in absolute terms, in terms of what we
promised investors, we really delivered on that.
Now volatility enters the picture.
You should see a far greater appreciation for quality.
But simultaneously, there are a number of events occurring in the market,
most of them centered around Donald Trump, that ultimately giving rise to this demand
for precious metals.
Platinum has its own demand drivers supply to our issues, but specifically gold You
know be it central banks moving away from the dollar
people worrying about risk and off the back of that gold Companies are doing
incredibly well.
So if you look at the combination of platinum miners and gold miners
In the South African index I mean we've gone back to the all-time highs of the
early 2000s where they represent about 30%
of the index so even though we expect a clients, investors,
the market as a whole to become more appreciative of what quality companies are
going to provide for you in this volatile
environment.
We could still be sitting here delivering excellent returns and looking at
potentially even higher returns from the
index if precious metals and precious metal miners more specifically continue to
do well.
It's extraordinary, isn't it?
I mean, this is a data point, a moment in time that I'm going to speak about now.
a couple of hours before we started chatting, Sumesh,
the gold price almost reached $4,900 per ounce.
And when I say those numbers, I have to sort of sit back in my chair and take a
deep breath because I can't quite
believe what I'm seeing.
Do you ever think, and this is a general philosophy now, do you ever think when you
see these sort of moves, you say, right, that's it?
I've had enough of this now.
It's too spiky.
I've got to take something off the table.
Or do you say to yourself, why?
It hasn't stopped yet.
Typically, yes.
When something gets that spiky, we take it off the table.
But when you think about something like gold, we don't have a whole lot of gold in
the portfolio.
Gold is somewhere between, depending on the portfolio you're looking at, gold is
somewhere between 3% and 5% of the portfolio.
And that's for a very specific reason.
It's because you can't place a value on gold.
We debate this all the time.
Should gold relate to inflation?
Should gold relate to money supply?
Should gold relate to other assets?
Even question marks now are about the relationship between gold and Bitcoin, you
know, because there's a limited supply.
And so when we hold gold in a portfolio, you kind of have to accept that eight
years out of 10,
nine years out of 10, it's not going to do anything.
And then in one particular year, it's going to do extraordinarily well.
Historically,
that's usually because the market's been absolutely collapsing and people flee to
gold.
It's been incredibly unusual in that
But the market has been doing so well in a number of areas and gold has run.
And I think what you're seeing there is what could potentially be a multi-year
phenomenon,
where central banks go back to diversifying away from US treasuries and
wanting more gold in their
arsenal.
And this remember, Lindsay, this started way back in,
I think it was 2022 when Russia invaded the Ukraine and the US weaponized the
dollar and said, look,
we're just going to seize Russian assets or we're going to freeze Russian assets.
And a lot of governments that weren't friendly towards the U.S.
set up, took notice.
You saw it with the People's Bank of China saying we've got to diversify away, sell
U.S.
treasuries, buy gold.
And central bank holdings relative to what they were back in the 70s when Nixon broke
the gold
standard, they're still just a fraction of what they used to be.
The bull market has been in place for a long time now, actually.
We're talking last year was glamorous, this year even more glamorous.
And look what happens, Samesh, when there's a South African podcast.
Eventually you have to start talking about gold.
It's just something that we do.
We go back to 2025.
To me it was a year when many of the well-established rules and relationships
between asset classes were thrown
out of the window.
When you sat down at your desk in 2026...
literally and metaphorically speaking.
What did you say to yourself?
Did you say, these are the opportunities, these are the risks?
Or did you just say, let's just see how things settle down a bit after an
extraordinary year.
Let's see how extraordinary pans out in 2026.
In other words, what did you hope for this year?
Definitely not sit back, see how things pan out, because the environment's been
shifting.
You know, obviously in terms of the risk of the volatility you mentioned earlier
on, it's a little bit of a rerun at the start of 2025.
Tariffs are very much in focus.
Trump or President Trump is up to the shenanigans that roiled the markets in the
early parts of last year.
But there's been a continuation of a theme I think that's quite important for South
African investors.
And according to our numbers, our analysis,
the theme is still continuing and there are elements that could still drive it.
And that that theme or that balance specifically, it's shifted away
I believe from global assets to slightly more towards SA assets.
Because they say assets have been out of favor for so long.
And what we're finding is that there's just a little bit of positivity that has
started to enter the
thinking of investors and that's creating this kind of like positive impetus.
'Cause if you think about what's happening in South Africa right now, there's a lot
of bad stuff.
We tend to focus on the bad.
I know we're hopeful as South Africans, we're resilient.
But of course you've got worsening GDP per capita, fixed capital formations
deteriorating, high level of unemployment.
We consumer, we know the story right?
But you think about the good.
So our fiscus, SARS, they're benefiting from the strong rally in precious metals.
To the extent that they haven't benefited, they will benefit.
They're going to collect higher taxes.
Oil prices are lower.
That's fantastic for the consumer.
The RAND is stronger, so you're going to see a stronger petrol price.
Load trading's hopefully behind us.
We got a sovereign credit upgrade.
We were taken off the grey list.
Consumers are feeling a little bit stronger in terms of the retail sales that
we're seeing.
You also saw passenger car sales increase last year.
I think they hit all-time highs.
And then hopefully you continue to see government move in the right direction,
maybe for the wrong reasons.
Maybe it's just a little bit of competition between ANC and DA.
but things are moving slowly in the right direction.
And what that has resulted in is bond deals absolutely coming in.
So bond deals at one point we were sitting at 12,
bond deals are now sitting at 850 and what that does is it gives us a lot of
breathing space in terms of our equity market
because the cost of capital is falling.
And so even though growth isn't there yet, SA equities for the first time in 10 years
are actually looking a lot more attractive.
But you've got to be so careful because the growth isn't there.
You have to pay attention to those select opportunities.
Now, maybe it's obvious to a lot of people and you should just be buying precious
metal producers.
We're quality investors.
We can't think like that.
We've got to think hard about those businesses that are the most resilient,
most consistent, produce the highest free cash flow.
Growth opportunity is still best offshore.
But valuation isn't as attractive as South Africa.
Valuation opportunity is better in South Africa, but the growth opportunity isn't
there.
And that's why I say that balance is shifting.
And that's what we're thinking very, very hard about.
And I suppose what consumers would feel most acutely is an additional benefit, the
RAND.
The RAND has strengthened materially.
Last year, this time, we were approaching, I think, 1910 in February.
We're at 1640 right now.
You know what happens with the rand?
And it's a very emotional currency.
It's a part of the family, isn't it?
If you're a South African person.
Yeah.
And as soon as the rand goes to 19, you've got to sell the rand.
As soon as the rand gets to 16, you've got to buy the rand.
And people get the rand very, very wrong and people get South Africa very wrong as
well, Sumesh.
And I've had fascinating chats with South African and overseas fund managers about
South Africa,
what happened last year and what might happen this year.
And this is a classic example of what I'm talking about now, two diametrically
opposed positions.
One person said, well, we're now off the grey list and the government of national
unity, this, etc.
And the other person in a completely separate interview, completely different
person, different company said, yeah,
you're off the grey list.
But on the other hand, the same day that you came off the grey list, so did Burkina
Faso and Nigeria.
So don't get too excited about it.
It's very interesting, isn't it?
There's always a buyer.
There's always a seller.
Yeah, I think what's important is you really have to divorce your emotional
attachment,
let's say your patriotic view of the country from what the hard numbers are
saying.
So one of the things we've been very clear on is the RAND is unforecastable.
Traders call it the rattler.
It's going to bite you.
You could get badly hurt if you take some sort of view on the RAND because of that
lack of forecastability.
We've always said here's a form of fair value for the RAND.
It's not going to move around as much as people think.
You've got to think about it much longer term and ultimately don't take a view on
the RAND,
but control the exposure you have to the RAND in your portfolio.
So by all means, if you wanted to make use of maximum offshore 45%,
make sure you've got something else balancing out that RAND risk.
Maybe you hedge some of the currency, maybe you take on some South African bonds
with a negative correlation.
Historically, we've liked to do both, but those individuals who've bet on the rant,
either way,
whether you are massively pro-SA or you're massively anti-SA, at some point in time,
you've been badly,
badly burnt.
Tell me about AI, if you would, if that's relevant to your strategies.
You can't ignore it, of course, but has it been a meaningful part of your strategies?
And if so, when you sit down and you have a look at something like NVIDIA, for
example, and I'm just talking about price action here,
end of last year, third quarter, sorry, fourth quarter of 2025, it got to...
plus $200, $205 per share it got to.
It's now down about $175, $176, something like that.
It's stalled.
It's by no means in a bear market, but it has stalled a bit.
And again, you've got OpenAI going to the market, sucking money out from other
companies.
Is there a chance that the bubble that was spoken about last year may be not a
bubble,
but certainly a slight deflation is possible?
if you see what I mean, deflating of the balloon?
- Yeah, very much so.
I think again investors were a little bit too emotional, they got too exuberant.
AI is going to change the world,
but there's an expectation that its impact is going to be very immediate as opposed
to, you know,
we're gonna wake up in 10 years and our lives are gonna be completely different.
And the example I usually like giving people is how they think about the tech
bubble back in 2000, 2001.
Those valuations got away from us And, you know,
when you looked at the world in 2002-2003,
the expectations that were embedded in the tech bubble didn't come to pass.
But sitting here in 2026, we're effectively always operating on the
Internet, right?
So you and I are doing this call over VoIP right now.
Everything is online.
Our files are stored in the cloud.
We're using search all the time.
We're shopping online.
Everything that was expected has come to pass, but it came to pass far later.
And so we look at, you know, you use the word bubble.
I'm a little bit uncomfortable about that.
I don't think we're in a bubble yet.
But there's this exuberance around what AI is going to deliver in terms of
productivity in 2026
and 2027.
And what worries us about that is that when you have these highly disruptive
businesses, when you have these first movers.
There are often companies that come along a little later and potentially do a little
better off the back of that.
And we think that you are seeing some of that competitive pressure actually emerge
in Nvidia right now,
because the creation of chips has actually broadened.
So Google's TPU is actually a fantastic chip for specific applications.
You have AMD coming to the fore, you've got Broadcom coming to the fore, but you
got to still focus on
AI is going to be beneficial.
So So as per any quality strategy,
we focus on those businesses that can't themselves be easily disrupted.
And there are only two businesses we believe or our work shows that are sitting
in that prime position and that's
ASML and TSMC because no one has been able to compete with them.
So EUV and DUV machines that carve the chip architectures onto silicon wafers and
of
course a foundry business.
They're absolutely dominant.
And anyone who is attempting to challenge them, they're decades away.
And so you might not get the explosive growth that you saw in NVIDIA in
2024 or from 2022 all the way up to 2024.
But as competitors catch up, you know,
you're still getting fantastic returns out of businesses like TSMC and ASML with
greater consistency.
And over time, we think it's a far better place for portfolio to be.
Let's wrap this up with the obvious question.
How are you positioned for 2026?
And as a little side issue to that question,
have you changed your positioning meaningfully in the last quarter of last
year and the first three weeks of
this year?
Not in the first three weeks of this year, but over the course of the quarter, the
balance has definitely drifted a little more to
South African equities.
So we've increased a bit of the South African equity exposure.
We funded as a little bit from our global equity exposure,
and we've taken a little bit of profit on the South African bonds that we're holding
just because they've moved as much as they
have.
So we are watching valuations very keenly.
We're still looking for opportunities.
But I think right now, given the shenanigans you've seen coming out of the
US right now,
you've got to be a little bit careful about DMs.
We think it's EM over DM in the very short term.
And I think, you know, seek out those opportunities in South Africa, few and far
between.
But yeah.
Great chat, Sumesh.
Thank you very much for that extended time.
Sumesh Chetty is a portfolio manager at 91 in
Cape Town.
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