You're listening to
Strictly Business Podcast
with
Lindsay
Williams.
in your voice.
You really were enjoying what you were doing.
It was an enjoyable 2025, wasn't it?
It was a fantastic year by the time we got to December.
Obviously, a couple of wobbles in the beginning with Liberation Day and things
like that.
So the reason that we weren't enthused about the market is that finally there was
positive momentum in South Africa.
The reforms that have been implemented.
We were starting to take root, and we could see that the country was heading in
the right place.
And some of the horrible discounts that had been sort of lumped on South Africa
over the many,
many years was people were starting to talk about South Africa, that the discount
might start disappearing.
And as I said, a bit of a global risk in the beginning,
but then when we could focus on South African issues and South African dynamics,
the bond market did very, very well.
Yes.
It did.
I don't know how to describe it because I know how to describe a situation where
everything's going bad.
And over the years, you know, that's been quite easy with South Africa.
It's called a perfect storm.
I don't know what the opposite of a perfect storm is.
But anyway, we got it.
Maybe we could just briefly go back and you referenced Liberation Day.
That's when Mr.
Trump stood up and announced all these extraordinary tariffs on every country in
the world,
some that didn't even exist.
went to something like 11.1%, 11.15%.
Look at it now, pushing 8%.
Just a potted history of the year, please.
The year started with promise,
but then after the inauguration of Trump and he started making the noises very
aggressively,
basically picking a fight with the rest of the world.
And I think it was right in the beginning of April, he had his so-called Liberation
Day where, as you said,
he announced all those tariffs.
And in some of those equity markets, 10%, 15%, 20% negative.
It was a complete catastrophe.
Markets panicked, bond yields sold off, currencies weakened, and it was absolutely
crazy.
And then thankfully there was a bit of that taco trade of Trump always chickens
out.
And by the time you got to December, you look back and you go, what happened to
Liberation Day?
Markets were up fantastically well.
African bonds did over 20%.
Our equities did over 40%.
I think you battle to get anything below 15%, 20% if you were in an equity market
around the world.
Yeah, it was an amazing year.
And we've got to start with the basics.
We've got to talk about the U.S.
dollar because I remember speaking to your colleague in London, Sahil Matani, about
the dollar.
And he was of the cautious opinion that the dollar bear market had started.
It can go on for quite a long time.
So the dollar under pressure, and emerging markets benefited from that, Malcolm.
Very much so.
So everyone goes, oh, the rand is so strong, the rand is so strong.
Whereas when you unpack it against the dollar, look here, we were in the top
tier, I think.
But I think we were only like number 10 or 11 as far as the best performers.
The year where I coined it, anything but the dollar.
There were only about four or five currencies that performed worse than the
dollar.
Thanks to Liberation Day, a lot of investors actually decided to diversify
their investments and they went
into Japan, they went into Europe, and then as the year progressed,
started actually investing in emerging markets, equities, bonds, and our
currencies.
And many, many emerging market currencies and bond markets did very,
very well as a result of that capital flow into their region.
So it really was a diversification.
sort of away from the uncertainty that has now been created around the dollar.
Yeah, and this is not part of this conversation, but you can see the
diversification of, for example,
central bank reserves by the extraordinary performance of the gold price.
Solid terms of trade is one thing that keeps on flashing across my screen along
with others which we'll deal with in a moment.
But that's also been a factor, hasn't it?
In South Africa, that is.
Absolutely.
So we benefited from the diversification just into our normal markets.
But because the central bankers are doing the same thing, we export gold and
platinum.
And that's predominantly the gold is what central bankers are diversified into,
which is fantastic news for the RAND.
And we track our terms of trade growth every single morning.
So one of the first charts I look at.
And, you know, when I came back from leave in early January, I looked at it and I
said, guys,
we are going to see 15 rand something on the rand dollar because that's what the
terms of trade are telling us.
You know, we are lagging what gold price and platinum price has done.
And, you know, thankfully, the rand is starting to play catch up now.
Yeah, I didn't realize you did it daily.
And it must have been looking very good this morning after what has happened in
precious metals markets over the last couple of days.
What about inflation?
Inflation is another one.
There was an enormous development last year regarding inflation targeting, which
you'll mention, of course.
But inflation is under control.
What is it?
Three and a half percent, something like that, which is right at the bottom.
Yeah.
So we came out at 3.69 December after hitting 2.8-ish, 2.9-ish for quite a few
months,
what, third quarter of last year.
Completely under control, as you say.
It's Lesetia, the Saab.
and his MPC members have done a phenomenal job.
They've anchored inflation expectations,
they started talking about the lower target quite early last year
and then in November when the minister announced that the target is now around
3%,
expectations actually continue to fall.
So it's changing behaviour, it will make the RAN more predictable.
It should reduce volatility of the currency over time.
And if we look at high inflation forecast now, is the 3.6 that came out a week or
two ago.
That's the peak and now it starts coming down again.
And we've actually got inflation for 2026 averaging 3.1%.
So pretty much spot on the target level for the Reserve Bank.
Which all comes together.
along with the government of national unity and being removed from the grey
list, it all comes together to make
South Africa quite attractive.
And again, I remember talking to one of your colleagues in the Cape Town office
and he said he was getting calls from people, Malcolm,
that he hasn't heard from for a couple of years, introducers of business, advisors,
and saying, tell me about South Africa.
And he said he hadn't had that for so long.
It was very refreshing.
So South Africa, it was starting to become attractive last year.
It built momentum.
Can the momentum continue in 2026?
Yes, it definitely can.
Because as I said, with this inflation under control, what it allows is the Saab
to actually cut rates this year.
I mean, there's whispers they might start now in January.
I think by March we would have had our first cut comfortably and possibly another
25 basis points a couple
of months later.
So at least a 50 basis points cut from the Saab.
Then you throw in this, what people forget is the terms of trade are boosted by the
commodity prices.
But what also is boosted is national treasury because royalties and mining
profits start
jumping up quite aggressively, quite quickly.
And those numbers are not in the budget.
And a very conservative estimate that we have got is that we could easily see
around 100, 110.
a billion rand extra this year and next year collected by the FISCUS,
which is money that can then be used to reduce the debt burden, consolidate the
budget,
consolidate the debt to GDP.
And those are all the things that S&P, you know, you mentioned the gray listing that
we got cut off.
We've also got an upgrade from S&P.
Believe it or not, we had an excess supply of electricity in December.
too much electricity being produced by the same company that couldn't keep the lights
on three, four years ago.
So that's the turnaround that's happened.
So things are looking very good for us and we're on a solid base.
And if we just sort of keep things together and don't shoot ourselves in the
foot,
that positive momentum can start leading to better growth.
No longer the half That's for 2025.
And then 2026, there's no reason why we can't be ticking up towards the 2% level
growth,
which is well on its way to that 3% level that everyone knows we need to get to.
Yes.
And that company you talked about turning itself around and actually being able to
have an excess of electricity rather than a shortage of
electricity actually turned a profit as well.
Very good news indeed.
We have to look at the US economy.
And you talked about growth of maybe The growth of the U.S.
economy, well above 4%, which has surprised everybody,
surprised all the naysayers and also incredibly important for South Africa,
despite the rather unpleasant comings and goings between Trump and Ramaphosa.
But anyway, U.S.
economy looking very good indeed.
Malcolm?
I mean, the way I describe it is it's exceptionally resilient.
You know, it also had the sort of banana curve.
Yeah, like at the beginning of the year there was nervousness about inflation and
then
when Liberation Day came everyone said oh shucks we've got inflation and now we're
going to have a recession.
So it went into that real stagflation sort of expectation.
But then, quite rightly, the numbers started coming out and we saw that
inflation was actually okay.
Maybe a little bit higher than the Fed wanted, but nothing like to unravel the
economy.
And the growth was very, very good.
So it almost went into that block where we call it the Goldilocks, where it's not too
hot, not too cold.
And in that environment, investors like taking risk.
And when they like taking risk, emerging markets are the recipients of that.
So people go, OK, we're doing very well at home.
But you know what?
The environment's good for emerging markets.
Let's get some exposure in South Africa, in Brazil, in Mexico.
And that's exactly what they've done.
So while inflation remains OK and growth remains resilient,
the environment for emerging markets in general is very, very good.
And that's very good for us in South Africa.
I can understand someone looking at the Liberation Day fallout and saying Gosh,
the South African bond above 11%
the 10-year.
I wouldn't mind having a nibble at that and buying the bonds anticipating the
yield coming down.
But it's just above 8%.
Can it be done again?
Can it still be bought?
What do you think?
What is the outlook for bonds this year?
Yeah, so that is a very pertinent question.
And I think the straight out answer is do not expect a year anything like last year.
Last year was a lot of catch up of a lot of bad, bad...
pricing for South Africa over many years.
And as we slowly tick the boxes and fix them quite rightly, investors rewarded the
country.
Going ahead now, you look at the market and you go, okay, can it be done for a
third?
You know, two years that have gone pretty well.
Can we do a third in a row?
And the answer is our competitors have got weaker.
And what I mean by that is inflation and cash are the bond market's biggest
competitors.
And, you know, Lesete and Iago can cut rates.
So there's a very good chance that cash rates are around 6%
there and thereabouts by the end of the year.
Inflation is around 3%.
So suddenly that 8, 8.25% sort of rate that you're looking at is actually quite
attractive.
It's 5% above inflation.
It's 2% to 3% above the cash rate.
what the alternative is that makes them attractive from that regard.
Something's got to go wrong, Malcolm.
It always does.
Please, let me curb your enthusiasm.
It's all too much now.
No, no, no.
I am a realist and what we have done is we've started putting a couple of
protective strategies because there's not as
much fat in the market but you've still got to make an informed decision and try
and do the best you can for
clients.
But also acknowledge that, yes, at these lower rates,
let's just make sure that we have got protection strategies in so that if
something does go wrong,
we can actually protect the portfolio during that wobble or the risk-off sort of
phase that happens.
So I'm not naive to think that it's all going to be in a straight line, it's all
going to be hunky-dory.
But if you invest at the right time and take the right opportunities and take risk
off when it's actually run quite hard,
I think you will be able to give a reasonable return.
in a bond or income fund this year.
So you're happy about the prospects for the 91 Diversified Income Fund, in short?
Absolutely.
I think there are going to be moments when things can go quite well for it.
But then equally, I think the trick is not to be greedy,
take risk off the table when it's done well and wait for a better opportunity to
get back in again.
Malcolm, thanks very much for your time.
That's Malcolm Charles, Portfolio Manager at 91 in Cape Town.
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