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The Asset Class: Sumesh Chetty · Strictly Business

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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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  year and the first three weeks of
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  this year?
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  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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  Great chat, Sumesh.
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  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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  Cape Town.
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• 17:57
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