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The Asset Class with Lisa MacCleod · Strictly Business

• 0:00
  You're listening to Strictly Business Podcast with Lindsay Williams.
• 0:05
  Welcome to this Cash Talk Podcast.
• 0:07
  With me is Lisa McLeod from 91 in Cape Town.
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  Let's get straight into currencies, please.
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  Lisa, and the mighty rand, why has it been so mighty?
• 0:15
  Hi, Lindsay.
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  Yeah, well, I think if you look year to date and you look at the rand versus the
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  dollar, we've actually appreciated around about
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  9% versus the dollar.
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  But if you look actually versus the euro, We've...
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  We've actually done the opposite.
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  We've actually depreciated by around sort of 2.4.
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  They're not necessarily poor performance versus the euro.
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  It's more or less in line with what we would have expected in terms of interest
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  rate differential.
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  So it's sort of performed as it should have.
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  But I guess my point is that it's mainly been a story of dollar weakness against
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  the RAND that's really driven the RAND
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  strength against the dollar this year.
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  On the other hand, I mean, I guess there are some...
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  positive factors that have filtered into the currency, despite the dollar weakness.
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  So if you look at the RAND against a basket of EM currencies, you've got to
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  take the beta into account.
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  But we have outperformed the last couple of months.
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  We've outperformed emerging market peers by around 2%.
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  And I think there are a couple of reasons for that.
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  I think there are a lot of positive fundamentals for South Africa.
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  We've got a prudent central bank.
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  we've generally been running higher real yields versus our peers.
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  Inflation is under control.
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  The outlook is positive.
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  I think the change in inflation targets also viewed as a positive one.
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  And then valuations in South Africa look attractive relative to
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  SAPers. And I think the last point I just wanted to make is in terms of trade.
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  That's really been quite strong.
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  You know, we've seen higher export prices, particularly in the precious metal side.
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  versus sort of lower oil prices on the import side.
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  And that's really been quite a positive factor in driving the rant.
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  And also the dollar is an incredibly important factor.
• 2:02
  It's been weak.
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  It's showing signs of strength again.
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  But why was the initial weakness and where do you see it going?
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  Yes, if you look at from the start of this year, you know, the weakness in the start
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  of the year has really been a story of U.S.
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  growth underperformance.
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  You know, it's a relative story.
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  So U.S.
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  policy has been undermining growth versus the rest of the world, which was...
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  which was starting to pick up, you know, in terms of policy.
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  It was, you know, tied to fiscal policy.
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  It was tariffs.
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  It was immigration policy.
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  And I think that weakness became part of a broader narrative around the longer-term
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  flow.
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  So that circular decline of the dollar, the U.S.
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  exceptionalism, and, you know, I guess investors diversifying away from the U.S.
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  I mean, this is very much obviously a longer-term picture.
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  You know, it's a much, much longer sort of time horizon.
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  But if I would say from our perspective, we're actually a little bit more
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  constructive on the dollar in the shorter term.
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  And that's really on the back of sort of a pickup in sort of US growth momentum.
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  And then us becoming a little bit more concerned about other areas and growth,
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  such as Eurozone growth, etc.
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  But despite a little bit more constructive view on the dollar in the shorter term,
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  we still remain quite constructive on the RAND for all of the reasons I've just
• 3:19
  chatted about.
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  What about the dollar and the US policy towards interest rates?
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  How does that sort of feed down to South Africa and also, of course, the South
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  African Reserve Bank?
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  And including that answer, if you would, Lisa, your inflation outlook?
• 3:35
  Yeah, I mean, I think firstly, you know, in terms of the Fed, you know,
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  it's quite key in terms of what the Fed will do and how that sort of impacts sort
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  of our sob.
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  I think the government shutdown has meant...
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  You know, there's been a delay in the release of key economic data.
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  So it's made it a lot more complicated for Fed policymaking.
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  And also difficult for us as a market to kind of how do we interpret how will the
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  Fed react with a lack of data.
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  But in terms of what we're thinking, we're thinking two more cuts for the Fed this
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  year will likely materialize.
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  And, you know, I think next year, perhaps a little bit more has been priced than we
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  would have expected.
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  But in saying that.
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  I think we also have to be careful around the Lisa Cook case is coming up.
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  If we have a very different Fed composition, we could end up with a lot
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  more cuts next year.
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  So we need to watch a lot of these developments.
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  But how does that translate into the Saab?
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  I think a faith that does.
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  cut more, will give more room for the SARB to cut going forward.
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  But as long as the RAND stays strong and not too volatile.
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  In terms of inflation, you know, we've seen a lot of downside surprises in
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  inflation, particularly in August, you know,
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  that was driven by food prices.
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  And our outlook is benign.
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  You know, we've just actually lowered our forecasts further.
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  So we're looking for 3.3% for this year and 3.7% for next year.
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  So I think it does create a backdrop where we've got subdued inflation.
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  We've also got inflation expectations coming down lower.
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  It's a positive terms of trade and a stronger RAND.
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  These are all sort of stars that are aligning from a cyclical perspective.
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  And we think that the SAR will cut rates further from here.
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  Timing is a bit uncertain, but in the absence of a risk event,
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  I think we will get at least another 25.
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  bips and red cuts between now and let's say sort of the first quarter of next
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  year.
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  Okay, we've got currencies, we've got international influences, we've got
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  interest rates, inflation.
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  What does all this mean for portfolios?
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  What are the implications, please, Lisa?
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  I think in an environment where risk assets are not trading well, let's just
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  say that's the risk, I think even in that environment,
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  the short end of the curve will be somewhat protected from, you know, if you
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  have to compare it to the long end of the bond curve.
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  So I think with a view for further rate cuts down the line, we have continued to
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  selectively add duration to the portfolios.
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  We're always mindful that there could be better entry levels, given that there's a
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  fair amount priced into the market.
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  But we've just continued to sort of add duration to the portfolios when we see
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  opportunities.
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  Lisa, thank you very much for your time.
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  Lisa McLeod is a portfolio manager at 91 in Cape Town.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams.
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  and various contributors and do not reflect the policy, position, or opinion
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  of any other agency, organization,
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  employer, or company associated with StrictlyBusinessPodcast.com.
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  Assumptions made on the analyses are not reflective of the position of any other
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  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, revision,
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  and rethinking at any time.
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  please do not hold us to them in perpetuity.