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The Asset Class: Ruen Naidu · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  The South African Reserve Bank's Monetary Policy Committee, unexpectedly to many,
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  left interest rates in South Africa
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  unchanged with the repo rate remaining at 7%.
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  With me now is Ruan Naidoo, Portfolio Manager at 91 in Cape Town.
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  Very interesting decision, Ruan, especially as it was a 4-2 split at the
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  MPC, 4 in favour of
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  leaving rates unchanged.
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  Yes, Lindsay, it was very interesting that it was a split decision.
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  And I think even more substantially, it was a big surprise to the market with
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  pretty much all the
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  economists, except for one or two, had expected an increase in interest rates at
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  the meeting.
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  And financial markets had been pricing even more than a 25 basis point move at
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  that particular meeting.
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  So it was quite a shock to all parties.
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  Yes, it was.
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  It got me thinking, are they suddenly shifting towards a growth focus rather
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  than an inflation focus because they know something that we
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  don't, that maybe inflation is under control?
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  Maybe because the 25 basis points rather of the previous meeting was a contributory
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  factor to keeping inflation under
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  control?
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  Or were they also looking at the relative resilience of the South African round?
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  Lots of factors there.
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  I think you spot on.
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  It's actually a combination of...
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  all three.
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  You know, they did say in the statement that risks to the growth outlook were on
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  the downside, even though they had
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  increased their forecast for growth for 2026.
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  You know, they explained this as largely a function of backward looking data, where
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  net exports had
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  surprised quite significantly to the positive side, you know, and the assertion
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  is that net exports
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  is not a huge driver of SAGDP and it actually shows you that there's lower
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  import demand, which suggests a slower economy.
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  So that was part of it.
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  The resilience of the RAND as well was mentioned, notwithstanding the impact that
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  their
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  decision not to hike rates had on the RAND, with RAND weakening about over 2.5%
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  on the day.
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  Yeah, and also that last point that you mentioned about the 25 basis point hike
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  that we had in May.
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  You know, that was described as a time-missed decision, perhaps an early
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  insurance cut.
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  They consider policy rates to still be restrictive at the current juncture.
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  So, you know, my take is that they actually are more comfortable to hold
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  rates at this high level for
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  longer rather than increase rates from this level.
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  I was going to ask you that question, actually, because we got this usual blurb
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  in the statement of we're going to take this on a meeting by meeting
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  basis and it'll all be data dependent, etc.
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  We're used to that.
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  But they also mentioned El Nino for future meetings.
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  They said that El Nino might have an effect on food inflation next food growing
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  season, not this one.
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  But on the other hand, they did mention it.
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  So it's a fear of theirs.
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  So does that support your view that rates will remain higher?
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  From, you know, looking at the forecast for the repo rate coming out of the QPM
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  model, you know, it
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  does suggest that policy rates will remain higher for longer as inflation gets back
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  down to the 3%
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  level.
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  And the other interesting, you know, piece that came out of it was the central bank
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  includes scenarios over
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  and above their baseline forecast.
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  So they have an adverse scenario where inflation expectations rise more than.
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  expected.
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  Another adverse scenario where the oil price tracks around $100 a barrel for
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  2026.
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  And in each of those adverse scenarios, the MPC actually considers a 25 basis
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  point hike as the
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  appropriate response.
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  So this is a lot more dovish than the scenario analysis at the previous two MPC
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  meetings, which saw much
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  more aggressive responses to a continued oil price spike.
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  So I I do believe there's a clear message here that they want to remain restrictive
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  for as long as it takes, but they
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  are going to be tolerant of some sort of move to the upper end of the band, of the
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  two to four
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  band.
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  Other reserve banks are going to be in focus later this week, notably the U.S.
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  Federal Reserve, which starts a two-day meeting tomorrow.
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  We'll get the decision on Wednesday evening South African time.
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  This is going to be a very interesting one.
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  It's the second meeting that has been under the stewardship of the new Fed
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  Chair.
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  Yes.
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  In our last discussion, when we covered the first meeting by Fed Chair Walsh, it
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  was clear that there
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  was a hawkish pivot taking place.
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  So as we enter into this week, going into the FOMC meeting, the market's currently
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  pricing about a 30%
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  probability of a rate hike at the meeting.
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  So that's not insignificant, whereas most economists are expecting an on-hold
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  decision.
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  One could look at that 30% probability and say it's actually underpricing the risk of
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  a rate hike.
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  There are various reasons why one could consider a rate hike at this meeting, not
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  least of which is the chair's
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  focus on restoring price stability.
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  We've had very hawkish statements coming out of the Federal Reserve presidents and
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  governors in the last few weeks.
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  infect.
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  If you look at a two-week change on the tone of their speeches, it is the most
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  hawkish
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  we've seen in a pivot for quite some time.
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  So that would argue for a rate hike at this meeting.
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  If you look at the U.S.
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  bond market, the 10-year briefly went above 4.70% a couple of days ago when the
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  oil price was
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  above $100 a barrel, back down at around about $90 a barrel now.
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  But is that one of the major factors in the back of their minds?
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  One day you're looking at an oil price that seems to be under control, and the
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  next minute a careless statement from a
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  politician sends it shooting up.
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  Is Walsh looking at that as well?
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  I think that's right.
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  The interesting thing about the move in U.S.
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  bonds, the move higher that we've seen in recent weeks, is that it has not been
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  driven by inflation
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  expectations.
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  It has been driven by an upward move in real rates, which is almost to say that
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  the market is...
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  pricing in higher policy rates.
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  It is pricing in a credible response from the Federal Reserve towards this inflation
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  problem that they currently have and have had
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  for many years.
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  And also, you know, when you look at something like inflation expectations,
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  Governor Lisa Cook mentioned that she's quite
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  comforted that inflation expectations through surveys remain anchored.
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  But she mentioned something very interesting along those lines.
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  What she said is Inflation expectations are anchored to the extent that the public
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  believes that the central
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  bank will do the right thing.
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  And then if you look at surveys of expectations from the consumer about where
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  they expect policy rates to go, the consumer
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  expects policy rates to increase over the course of this year.
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  So it does seem like this credibility that's built into the bond market there is
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  a function of a Fed that does deliver
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  price stability through higher rates.
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  Yes, we'll get a fascinating statement on Wednesday evening, as I said.
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  But overall, if you look at the world's bond markets, some inflation expectations
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  differ from country to
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  country, of course.
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  But would you say that we're likely to see elevated bond yields and therefore a bond
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  market that is under relative
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  pressure for the rest of the year?
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  It's tough to make that remark for the rest of the year.
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  You know, I do believe that there are enough factors to drive yields higher.
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  you know, whether it is fiscal deficits that are wide and show no path lower at
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  this point in time in most
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  developed market jurisdictions, you know, that's one particular reason.
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  The other is that inflation seems to continue to be running hot, whether it's
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  through, you know, past
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  tariffs, or whether it's energy, or whether it's the AI CapEx expansion that
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  is pushing inflation higher.
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  But I don't want to lose sight of a bond's Um, purpose in a portfolio, which is to
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  hedge your
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  risk assets over and above generating income.
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  And, you know, there are many remarks about whether the AI trade is some sort of
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  bubble, whether there's
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  too much of froth in the market.
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  So I do think if there is trouble in the risk asset space, you know, that's when
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  bonds could rally and
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  could support portfolios.
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  There still is a place in the portfolio for bonds at this point.
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  So despite what the South African Reserve Bank has done and potentially what the US
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  Federal Reserve does, your portfolio positioning remains the
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  same, Ruan?
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  Yes, you know, we have been making some changes to the portfolio post the SARB
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  MPC, you know, just reducing
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  the amount of exposure that we have for near term rate increases given this
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  reaction function change at the SARB.
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  And that's been the most significant change that we've made.
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  we've also added dollars in the funds that can take foreign exposure.
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  And, you know, that's actually worked quite nicely to protect the portfolio, you
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  know, as the RAN had weakened post that MPC meeting.
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  Ruan, thank you very much for your insights.
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  Ruan Naidoo 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 and
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  various contributors and do not reflect the policy,
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  change, revision, and revision.
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  and rethinking at any time.
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