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The Asset Class with David Knee · Strictly Business

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You're listening to Strictly Business Podcast with Lindsay Williams.
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They say that travel broadens the mind.
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So let's go around the world with David Nee, head of Multi-Asset 91 in Cape Town.
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And when we were chatting about what to talk about in this podcast,
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David said he's happy to talk about the bigger picture, growth, inflation,
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productivity,
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bond equity valuations, the dollar, investor positioning, prospective returns.
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David, is that all?
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Or should we do some more in the 10 minutes that we've got?
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But seriously, let's start with growth, shall we?
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Because it's interesting.
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President Donald Trump, in his State of the Union address recently, said growth
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bowling along at 4% to 5%
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in the United States.
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It was briefly, now back to 1.4%.
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But generally, in the world's biggest economy, our first destination, it's
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pretty good, isn't it?
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Yeah, look, it's, I think, the ongoing fixed investment party that is...
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playing out in the US in particular is certainly driving growth,
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although clearly from a sector positioning perspective,
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it's not universally lifting kind of all boats in the way that you'd expect
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from a kind of more regular economic expansion.
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But the growth numbers generally continue to benefit from the easing of monetary
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policy that we
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saw kind of worldwide.
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but continuing in the US and the UK,
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there's even a small probability of a cut now being priced into Europe.
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So, you know, that sort of monetary policy expansion combined with some fiscal easing
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that has,
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I mean, we're waiting for the one big beautiful bill to really start kicking in
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and
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in Europe to see some of those defence budgets expanding.
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So the backdrop still seems to be that this particular period of economic
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expansion is likely to
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continue through 2026.
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Yes, many people say that in Europe it's not just about fiscal policy and monetary
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policy, it's also about deregulation,
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which the United States is very good at under Trump.
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So we'll see if that happens.
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We haven't spoken about China.
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China's not quite as clear cut from what I can make out.
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No, I think it is.
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What's been interesting there is, unlike certain previous episodes,
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where the policy support that has been deployed in the face of more
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challenging macro growth has been more limited this time.
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So there's been a much clearer desire to see a correction in the property market
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and to
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let that play through without creating, you know.
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a hard economic landing.
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But by any conventional measures,
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if one looks at what's happening to inflation and growth,
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then China would sit in an environment that I think some might characterize as
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almost
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recessionary.
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There still are a lot of policy levers that they can pull and consensus
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expectation, I think still
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Chinese growth at 4.5% or something like that for 2026.
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Obviously, one wonders always about the accuracy of some of those statistics.
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But yeah, it has been, I think it's fair to say,
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it's been disappointing in terms of its growth outcomes.
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Let's move to inflation now.
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Fascinating subject, because after Liberation Day, everybody, almost
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everybody anyway,
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was talking about inflation rising and rising fairly dramatically in the United
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States as inflation was
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imported.
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But here we are with, I think.
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CPI inflation, consumer price inflation at around about 2.4% it is and core
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inflation,
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I think 1.7%.
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So everyone, all the experts, all the economists getting it completely wrong.
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That's very good news for monetary policy, of course.
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Yes.
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I mean, the inflationary impulse has been surprising economists now for certainly if
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you look at kind of,
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you know, headline inflation around the world, you know, for the best part of two
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years.
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Economists have been concerned about the underlying stickiness of prices,
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the anchoring of inflation expectations at a higher level than we've seen in recent
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decades.
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And those have been themes that we observe in, you know,
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the concerns that have manifested across those forecasts.
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And inflation is essentially then surprised on the downside.
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And that has opened the door to, you know.
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I guess, the rate cuts that we've seen across the developed world.
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Although one, you know, I think it's important to note that there are countries
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now,
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Australia and Canada come to mind in particular.
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New Zealand is also starting to pivot where rates are either rising or
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or the market is anticipating monetary policy tightening.
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Can I also mention South Africa when it comes to inflation?
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Because inflation under control, the last print I saw, was rather gratifying.
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And the forecasts for the rest of the year are that inflation will stay under control
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and in fact fall.
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Do you share that view?
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I mean, I think the inflation outlook in South Africa remains benign and the
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reserve banks move to a new 3%.
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target, yeah, I think has created an ongoing re-anchoring of inflation
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expectations
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lower, then sees a kind of virtuous loop developing where price setting behavior
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and wage setting behavior adjusts to a structural shift lower in long-term
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inflation views.
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And that has clearly been reflected in the performance of South African financial
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markets too,
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where we've seen an enormous rally in South African bonds.
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and equities.
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Globally, do you think productivity is going to continue to be boosted, as it
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seems to be now, by innovations in tech,
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AI, for example?
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Yes.
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I mean, that is a $64,000 question.
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I think the broad view across the market is that it will be productivity enhancing.
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One of the challenges historically with a lot of the technological advances that
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we've we've seen in our lifetimes, Lindsay.
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We've gone from in the
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1980s, what would now be probably a small home computer being the size of a car.
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But up until very recently, you hadn't seen any real productivity benefits across
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much of the developed
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world.
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And the same, the implementation of the World Wide Web and the access to computing
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power in your pocket,
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in your smartphone.
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And that does create some...
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I think the bond investor in me kind of has some scepticism about how big a change
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it will make.
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But the broad acceptance across economists is that it will be productivity
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enhancing.
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Well, interestingly then, obviously, there's a divided camp about what that
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means for interest rates,
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because the Kevin Walsh view is that higher productivity will mean that
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you can have a lower level of rates, Whereas You know,
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I think some of the other federal reserve governors in the US would say quite the
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contrary,
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that higher productivity means higher GDP growth and means a higher neutral real
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interest rate.
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So, you know, I think there's a lot yet which needs to kind of be determined.
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And also, whilst we see productivity strong in the US, much less of it kind of
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evident in the UK or in Europe yet.
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Yeah, again, playing catch up to a Trump America, if you like.
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the dollar While we're talking about America, we have to talk about the dollar.
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I had an excellent chat with one of your colleagues in London.
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And rather than talking about the debasement of the US dollar, we talked
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about the sort of gradual decline of the US dollar and how long that
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might last.
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And it seems to be a reality now.
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OK, it seems to be quite stable, certainly against the euro around that 118 level.
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But the future seems to be less than bright for the world's reserve currency.
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core expectation would be that the dollar would gently and gradually depreciate
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against other global
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currencies.
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I mean, in part, one has to kind of recognize that you have had, I mean, bar
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last year,
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up until then, you'd had pretty much 14 or 15 years of dollar appreciation.
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And you went from a, you know, a real effective exchange rate low at the end of
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2007 to
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you know, close to a real effective exchange rate high at the end of 2024.
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And even with the dollar depreciation that we saw in the first half of last year, you
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know,
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the long term chart still shows the dollar looking pretty elevated.
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And I think that there are good reasons to think that the amount of liquidity
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creation that's going on
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in the US will continue to provide an impetus for
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dollar depreciation over the next decade or so, particularly from this level of, I
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think, of elevated valuation.
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And of course, what that means is for everyone, actually, I mean, for emerging
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markets,
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they have to then adjust their policies towards their currency staying stronger
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against the US dollar by
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definition.
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And even bond investors and equity investors in any country in the world have
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to also look at their investor positioning.
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So what we should look at now is...
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Three subjects in one, actually, bond and equity valuations,
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how you're positioned at 91 and what your prospective returns are.
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So let's look at bond and equities and bring in your position while talking about
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that, please.
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2025 was an extraordinary year because bond and equities didn't behave as they
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normally behave with each other, did they?
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No, sure.
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I mean, it was I think most people thought that you were going to get a.
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A much more profound bond market sell-off on the back of the, particularly of the
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Liberation Day,
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tariffs and an expected surge in inflation,
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and that those tariffs would also negatively impact economic activity and
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you would see then a rippling through into equities.
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Well, you know, it turned out to be, I mean, more than a decent year in equities.
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I mean, in some cases, I mean, absolutely stellar.
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I mean, you look at some of the peripheral markets in Europe, some of the Southern
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European markets, you know,
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the Greek market was up 80% last year, and
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South African market up over 40, Korean market, I think, up 80%.
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So you had some extraordinary returns coming through.
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The S&P lagged, but was still up 20.
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It was a very decent year.
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And on top of that...
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You didn't see the inflation coming through,
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which surprised everybody because it seemed to fly in the face of what
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standard economic theory would suggest is going to happen when you move tariffs from
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about a 2% or 3% average to a
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15% average rate.
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And so, you know, bonds also had a better time than people kind of had anticipated
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they would.
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And long bond yields, particularly towards the end of the year, started to perform
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very well.
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I mean, from here, Lindsay, I mean,
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one certainly needs to say that equity valuations are not at levels that would be
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considered cheap
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compared to their long-term histories.
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So we have a valuation headwind in many markets,
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but we also have ongoing strong earnings delivery on the back of the growth
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environment that we've talked about.
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And it would be extremely unusual in a world where earnings continue to deliver.
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mid-teens levels of growth and to beat expectations for the equity market
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to turn down.
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So I think that that is the environment that we're in.
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Bonds, I think, still look pretty well supported in an environment where
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inflation
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maintains its sort of gentle downward trajectory.
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And we continue to see overall.
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you know, the US cutting rates further, whether that's two cuts or three cuts, I
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think it's not super,
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super important to having a reasonable return in hard currency from fixed income
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instruments.
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So overall, in positioning, we still remain constructively positioned in risk
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assets,
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particularly in equities, where we see that earnings delivery story and the
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economic growth continuing through
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26 as being supportive.
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I think on fixed income, developed market fixed,
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we would prefer to fish in some of the idiosyncratic stories across emerging
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markets.
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So the likes of Brazil and South Africa have had strong idiosyncratic stories.
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You've got structural change going on in South Africa that we've discussed in terms
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of its rates and inflation dynamic.
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I think also the potential growth being lifted by various initiatives to bring the
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private sector into various domains that were
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previously occupied.
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by relatively inefficient public companies.
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And I think that that, you know, that looks pretty compelling to us.
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So those, I think, some of the possibilities that look attractive to us
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right now.
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It's going to be an interesting year compared to 2025, because 2025, as you
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said, 80%
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return from the Greek market, the Korean market, 40% from South Africa, 20% from
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the S&P,
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which nobody would have predicted at the beginning of the year.
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They might have and said, well, maybe we'll get up to 15%.
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But anyway, it was a fantastic year.
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You're not going to get that again.
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And you're not going to get a broad based tech rally,
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because it's already starting to become a little bit disjointed between certain tech
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sectors.
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But overall, 2026 has a sort of a Goldilocks feel about it, David,
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as we conclude this discussion.
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And that's pretty good for most risk asset classes, isn't it?
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I think you're right, we would characterize it as a Goldilocks scenario.
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That will be a scenario broadly when we think about macro regimes of growth
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surprising
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kind of sequentially on the upside and inflation surprising on the downside.
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And that's how the macro data is currently playing through.
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And those environments in history have been constructive for bonds and for
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equities.
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So, yeah, I mean, I think you're right in kind of highlighting a kind of
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constructive view overall.
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The challenge for investors is that there is some notion that we're kind of running
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out of steam.
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And therefore, I think that there will be a point at which When we see that earnings
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delivery start to turn down,
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if we start to see that the monetary policy easing cycle across the US,
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the UK and elsewhere is coming to an end,
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or we start to see some sequential disappointment in economic activity, then
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those, I think,
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are all warning signs for investors that would certainly lead us to be reducing our
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overweight position in
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equities.
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and to be adding duration to portfolios at that point in time.
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But that point doesn't feel like it's now.
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David, thank you very much for your time.
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David Nee is Head of Multi-Asset at 91 in Cape Town.
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The views and opinions expressed in these podcasts are those of Lindsay Williams and
16:08
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