WEBVTT

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

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With me is Sumesh Chetty, Portfolio
Manager at 91 in Cape Town and we're going

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to talk about where to find

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quality in 2026.

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That'll be the core of our theme anyway
and obviously we'll expand out from there,

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Sumesh,

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because 2025, having started the second
quarter on a very,

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very shaky footing...

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It turned out to be the most splendid
year, didn't it?

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Absolutely incredible.

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Yeah, Lindsay, thank you so much for
having me.

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But it wasn't really a year for quality if
you think about what performed in 2025.

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You know, specifically thinking about
speculative companies overseas that were

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very much in vogue,

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think about the AI trade.

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And then of course, locally, it's the
precious and the other metal producers

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that were running really hard.

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So, not a wonderful year for quality
managers.

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But in spite of that, in absolute return
terms, we deliver on all our promises to

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clients.

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It really was a little bit of a struggle
though relative to some of let's call them

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the more index focused managers.

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Did you feel a little bit left out as the
rest of the market ran away?

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I mean, I'm always...

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Actually, it was sort of there's a
facetious element to that question.

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But on the other hand, you do look at it
and sort of gnash your teeth a little bit

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and say, well, this When will the time be
right for quality?

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Because quality shines at different times,
doesn't it?

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No, of course.

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As a portfolio manager, you always want to
outperform all the time.

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It doesn't matter what the market
conditions are.

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But realistically, that's never going to
be the case.

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So you do have to accept periods where
your style,

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your process is out of favor.

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And unfortunately, 2025 was one of those
years.

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Okay, 2026 now, you might be looking at
the...

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Last few days of volatility.

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Here we are pre-recording on Thursday the
21st. And the last few days of volatility,

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when I say volatility,

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I mean downside movements for certain
asset classes.

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You might be saying, right, now is the
time where quality rises to the surface.

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Is that what you're thinking?

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Very bluntly, yes, quality will rise to
the surface here.

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But I think let me step back a little bit
because, you know, the implication of me

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saying yes suggests that quality didn't do
well.

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last year.

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Quality did very well last year.

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So if you think about the quality
portfolios that we run and you think about

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those pure quality

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equities,

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you had very high double-digit returns in
dollars.

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But ultimately what impacted you was that
the market did slightly better because of

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that AI trade,

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as I mentioned.

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So investors are always looking at this on
a relative basis.

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And that's why I said to you up front, in
absolute terms, in terms of what we

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promised investors, we really delivered on
that.

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Now volatility enters the picture.

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You should see a far greater appreciation
for quality.

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But simultaneously, there are a number of
events occurring in the market,

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most of them centered around Donald Trump,
that ultimately giving rise to this demand

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for precious metals.

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Platinum has its own demand drivers supply
to our issues, but specifically gold You

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know be it central banks moving away from
the dollar

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people worrying about risk and off the
back of that gold Companies are doing

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incredibly well.

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So if you look at the combination of
platinum miners and gold miners

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In the South African index I mean we've
gone back to the all-time highs of the

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early 2000s where they represent about 30%

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of the index so even though we expect a
clients, investors,

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the market as a whole to become more
appreciative of what quality companies are

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going to provide for you in this volatile

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environment.

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We could still be sitting here delivering
excellent returns and looking at

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potentially even higher returns from the

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index if precious metals and precious
metal miners more specifically continue to

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do well.

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It's extraordinary, isn't it?

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I mean, this is a data point, a moment in
time that I'm going to speak about now.

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a couple of hours before we started
chatting, Sumesh,

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the gold price almost reached $4,900 per
ounce.

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And when I say those numbers, I have to
sort of sit back in my chair and take a

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deep breath because I can't quite

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believe what I'm seeing.

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Do you ever think, and this is a general
philosophy now, do you ever think when you

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see these sort of moves, you say, right,
that's it?

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I've had enough of this now.

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It's too spiky.

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I've got to take something off the table.

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Or do you say to yourself, why?

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It hasn't stopped yet.

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Typically, yes.

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When something gets that spiky, we take it
off the table.

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But when you think about something like
gold, we don't have a whole lot of gold in

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the portfolio.

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Gold is somewhere between, depending on
the portfolio you're looking at, gold is

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somewhere between 3% and 5% of the
portfolio.

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And that's for a very specific reason.

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It's because you can't place a value on
gold.

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We debate this all the time.

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Should gold relate to inflation?

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Should gold relate to money supply?

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Should gold relate to other assets?

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Even question marks now are about the
relationship between gold and Bitcoin, you

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know, because there's a limited supply.

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And so when we hold gold in a portfolio,
you kind of have to accept that eight

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years out of 10,

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nine years out of 10, it's not going to do
anything.

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And then in one particular year, it's
going to do extraordinarily well.

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Historically,

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that's usually because the market's been
absolutely collapsing and people flee to

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gold.

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It's been incredibly unusual in that

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But the market has been doing so well in a
number of areas and gold has run.

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And I think what you're seeing there is
what could potentially be a multi-year

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phenomenon,

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where central banks go back to
diversifying away from US treasuries and

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wanting more gold in their

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arsenal.

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And this remember, Lindsay, this started
way back in,

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I think it was 2022 when Russia invaded
the Ukraine and the US weaponized the

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dollar and said, look,

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we're just going to seize Russian assets
or we're going to freeze Russian assets.

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And a lot of governments that weren't
friendly towards the U.S.

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set up, took notice.

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You saw it with the People's Bank of China
saying we've got to diversify away, sell

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U.S.

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treasuries, buy gold.

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And central bank holdings relative to what
they were back in the 70s when Nixon broke

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the gold

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standard, they're still just a fraction of
what they used to be.

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The bull market has been in place for a
long time now, actually.

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We're talking last year was glamorous,
this year even more glamorous.

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And look what happens, Samesh, when
there's a South African podcast.

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Eventually you have to start talking about
gold.

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It's just something that we do.

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We go back to 2025.

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To me it was a year when many of the
well-established rules and relationships

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between asset classes were thrown

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out of the window.

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When you sat down at your desk in 2026...

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literally and metaphorically speaking.

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What did you say to yourself?

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Did you say, these are the opportunities,
these are the risks?

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Or did you just say, let's just see how
things settle down a bit after an

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extraordinary year.

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Let's see how extraordinary pans out in
2026.

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In other words, what did you hope for this
year?

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Definitely not sit back, see how things
pan out, because the environment's been

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shifting.

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You know, obviously in terms of the risk
of the volatility you mentioned earlier

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on, it's a little bit of a rerun at the
start of 2025.

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Tariffs are very much in focus.

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Trump or President Trump is up to the
shenanigans that roiled the markets in the

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early parts of last year.

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But there's been a continuation of a theme
I think that's quite important for South

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African investors.

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And according to our numbers, our
analysis,

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the theme is still continuing and there
are elements that could still drive it.

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And that that theme or that balance
specifically, it's shifted away

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I believe from global assets to slightly
more towards SA assets.

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Because they say assets have been out of
favor for so long.

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And what we're finding is that there's
just a little bit of positivity that has

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started to enter the

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thinking of investors and that's creating
this kind of like positive impetus.

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'Cause if you think about what's happening
in South Africa right now, there's a lot

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of bad stuff.

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We tend to focus on the bad.

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I know we're hopeful as South Africans,
we're resilient.

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But of course you've got worsening GDP per
capita, fixed capital formations

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deteriorating, high level of unemployment.

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We consumer, we know the story right?

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But you think about the good.

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So our fiscus, SARS, they're benefiting
from the strong rally in precious metals.

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To the extent that they haven't benefited,
they will benefit.

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They're going to collect higher taxes.

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Oil prices are lower.

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That's fantastic for the consumer.

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The RAND is stronger, so you're going to
see a stronger petrol price.

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Load trading's hopefully behind us.

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We got a sovereign credit upgrade.

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We were taken off the grey list.

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Consumers are feeling a little bit
stronger in terms of the retail sales that

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we're seeing.

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You also saw passenger car sales increase
last year.

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I think they hit all-time highs.

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And then hopefully you continue to see
government move in the right direction,

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maybe for the wrong reasons.

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Maybe it's just a little bit of
competition between ANC and DA.

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but things are moving slowly in the right
direction.

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And what that has resulted in is bond
deals absolutely coming in.

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So bond deals at one point we were sitting
at 12,

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bond deals are now sitting at 850 and what
that does is it gives us a lot of

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breathing space in terms of our equity
market

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because the cost of capital is falling.

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And so even though growth isn't there yet,
SA equities for the first time in 10 years

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are actually looking a lot more
attractive.

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But you've got to be so careful because
the growth isn't there.

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You have to pay attention to those select
opportunities.

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Now, maybe it's obvious to a lot of people
and you should just be buying precious

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metal producers.

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We're quality investors.

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We can't think like that.

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We've got to think hard about those
businesses that are the most resilient,

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most consistent, produce the highest free
cash flow.

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Growth opportunity is still best offshore.

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But valuation isn't as attractive as South
Africa.

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Valuation opportunity is better in South
Africa, but the growth opportunity isn't

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there.

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And that's why I say that balance is
shifting.

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And that's what we're thinking very, very
hard about.

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And I suppose what consumers would feel
most acutely is an additional benefit, the

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RAND.

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The RAND has strengthened materially.

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Last year, this time, we were approaching,
I think, 1910 in February.

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We're at 1640 right now.

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You know what happens with the rand?

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And it's a very emotional currency.

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It's a part of the family, isn't it?

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If you're a South African person.

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Yeah.

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And as soon as the rand goes to 19, you've
got to sell the rand.

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As soon as the rand gets to 16, you've got
to buy the rand.

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And people get the rand very, very wrong
and people get South Africa very wrong as

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well, Sumesh.

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And I've had fascinating chats with South
African and overseas fund managers about

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South Africa,

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what happened last year and what might
happen this year.

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And this is a classic example of what I'm
talking about now, two diametrically

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opposed positions.

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One person said, well, we're now off the
grey list and the government of national

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unity, this, etc.

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And the other person in a completely
separate interview, completely different

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person, different company said, yeah,

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you're off the grey list.

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But on the other hand, the same day that
you came off the grey list, so did Burkina

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Faso and Nigeria.

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So don't get too excited about it.

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It's very interesting, isn't it?

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There's always a buyer.

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There's always a seller.

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Yeah, I think what's important is you
really have to divorce your emotional

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attachment,

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let's say your patriotic view of the
country from what the hard numbers are

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saying.

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So one of the things we've been very clear
on is the RAND is unforecastable.

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Traders call it the rattler.

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It's going to bite you.

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You could get badly hurt if you take some
sort of view on the RAND because of that

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lack of forecastability.

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We've always said here's a form of fair
value for the RAND.

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It's not going to move around as much as
people think.

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You've got to think about it much longer
term and ultimately don't take a view on

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the RAND,

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but control the exposure you have to the
RAND in your portfolio.

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So by all means, if you wanted to make use
of maximum offshore 45%,

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make sure you've got something else
balancing out that RAND risk.

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Maybe you hedge some of the currency,
maybe you take on some South African bonds

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with a negative correlation.

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Historically, we've liked to do both, but
those individuals who've bet on the rant,

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either way,

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whether you are massively pro-SA or you're
massively anti-SA, at some point in time,

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you've been badly,

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badly burnt.

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Tell me about AI, if you would, if that's
relevant to your strategies.

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You can't ignore it, of course, but has it
been a meaningful part of your strategies?

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And if so, when you sit down and you have
a look at something like NVIDIA, for

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example, and I'm just talking about price
action here,

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end of last year, third quarter, sorry,
fourth quarter of 2025, it got to...

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plus $200, $205 per share it got to.

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It's now down about $175, $176, something
like that.

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It's stalled.

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It's by no means in a bear market, but it
has stalled a bit.

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And again, you've got OpenAI going to the
market, sucking money out from other

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companies.

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Is there a chance that the bubble that was
spoken about last year may be not a

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bubble,

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but certainly a slight deflation is
possible?

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if you see what I mean, deflating of the
balloon?

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- Yeah, very much so.

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I think again investors were a little bit
too emotional, they got too exuberant.

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AI is going to change the world,

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but there's an expectation that its impact
is going to be very immediate as opposed

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to, you know,

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we're gonna wake up in 10 years and our
lives are gonna be completely different.

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And the example I usually like giving
people is how they think about the tech

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bubble back in 2000, 2001.

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Those valuations got away from us And, you
know,

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when you looked at the world in 2002-2003,

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the expectations that were embedded in the
tech bubble didn't come to pass.

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But sitting here in 2026, we're
effectively always operating on the

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Internet, right?

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So you and I are doing this call over VoIP
right now.

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Everything is online.

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Our files are stored in the cloud.

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We're using search all the time.

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We're shopping online.

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Everything that was expected has come to
pass, but it came to pass far later.

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And so we look at, you know, you use the
word bubble.

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I'm a little bit uncomfortable about that.

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I don't think we're in a bubble yet.

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But there's this exuberance around what AI
is going to deliver in terms of

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productivity in 2026

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and 2027.

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And what worries us about that is that
when you have these highly disruptive

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businesses, when you have these first
movers.

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There are often companies that come along
a little later and potentially do a little

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better off the back of that.

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And we think that you are seeing some of
that competitive pressure actually emerge

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in Nvidia right now,

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because the creation of chips has actually
broadened.

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So Google's TPU is actually a fantastic
chip for specific applications.

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You have AMD coming to the fore, you've
got Broadcom coming to the fore, but you

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got to still focus on

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AI is going to be beneficial.

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So So as per any quality strategy,

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we focus on those businesses that can't
themselves be easily disrupted.

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And there are only two businesses we
believe or our work shows that are sitting

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in that prime position and that's

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ASML and TSMC because no one has been able
to compete with them.

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So EUV and DUV machines that carve the
chip architectures onto silicon wafers and

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of

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course a foundry business.

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They're absolutely dominant.

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And anyone who is attempting to challenge
them, they're decades away.

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And so you might not get the explosive
growth that you saw in NVIDIA in

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2024 or from 2022 all the way up to 2024.

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But as competitors catch up, you know,

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you're still getting fantastic returns out
of businesses like TSMC and ASML with

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greater consistency.

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And over time, we think it's a far better
place for portfolio to be.

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Let's wrap this up with the obvious
question.

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How are you positioned for 2026?

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And as a little side issue to that
question,

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have you changed your positioning
meaningfully in the last quarter of last

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00:16:47.253 --> 00:16:49.253
year and the first three weeks of

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00:16:49.253 --> 00:16:51.253
this year?

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00:16:51.253 --> 00:16:54.496
Not in the first three weeks of this year,
but over the course of the quarter, the

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balance has definitely drifted a little
more to

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South African equities.

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So we've increased a bit of the South
African equity exposure.

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We funded as a little bit from our global
equity exposure,

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and we've taken a little bit of profit on
the South African bonds that we're holding

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just because they've moved as much as they

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have.

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So we are watching valuations very keenly.

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We're still looking for opportunities.

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But I think right now, given the
shenanigans you've seen coming out of the

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US right now,

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you've got to be a little bit careful
about DMs.

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We think it's EM over DM in the very short
term.

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And I think, you know, seek out those
opportunities in South Africa, few and far

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between.

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But yeah.

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00:17:37.295 --> 00:17:38.155
Great chat, Sumesh.

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00:17:38.195 --> 00:17:40.396
Thank you very much for that extended
time.

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Sumesh Chetty is a portfolio manager at 91
in

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00:17:48.140 --> 00:17:50.941
Cape Town.

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00:17:51.761 --> 00:17:56.822
and do not reflect the policy, position or
opinion of any other agency, organization,

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00:17:57.163 --> 00:18:01.784
employer or company associated with
StrictlyBusinessPodcast.com.

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00:18:02.264 --> 00:18:09.226
Assumptions made on the analyses are not
reflective of the position of any other

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00:18:09.226 --> 00:18:11.226
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,

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00:18:14.987 --> 00:18:17.548
revision and rethinking at any time.

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Please do not hold us to them in
perpetuity.
