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The Asset Class: Steph Naidoo · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  Let's look at the SA corporate credit market now with Steph Naidoo, Portfolio
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  Manager at 91 in Cape Town.
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  Steph, I think we've got a bit of a dichotomy here because, as we know, the
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  South African economy is fairly anemic at the moment
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  and yet the SA corporate credit market seems to be quite perky in 2026.
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  What's going on?
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  Yeah, thanks, Lindsay.
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  You know, I think it's really just… two different scoreboards at the moment.
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  You know, if we look at some of the economic growth indicators, we believe
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  that Q1 GDP growth print was flattered somewhat by
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  agriculture and some positive net export swings rather than broad domestic demand.
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  So we're likely to see some downside risks for growth for the full year.
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  And then additionally, while we've seen some disinflation in that last May CPI
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  print, we've since seen quite a
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  lot of price action on Brent.
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  So likely to see some inflationary pressures.
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  And in fact, the market's now pricing in a further 25 basis points hike.
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  And then if we contrast that to what's happening on the credit side, we've seen
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  really strong demand due to institutional players
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  looking for yield and credit.
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  Banks competing for quality corporate paper and really shrinking supply with net
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  issuance sharply negative
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  on the back of lower growth, as well as some redemptions, ESCOM ES26s, for
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  example.
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  that was 38 billion that wasn't refinanced in the public market.
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  So while we've seen an improved operating environment with those sovereign upgrades
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  from Moody's and Fitch, and pretty
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  much improved credit quality at the top end of the rating band, it's really these
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  technical strength factors from credit
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  sitting on top of a largely soft macro backdrop.
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  Yes, you talk about the top end of the rating band, and that means that the word
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  quality has to come to the fore here.
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  You've always favoured Quality, Steph, is that still the position?
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  Is that how you're positioning yourself with quality?
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  Yeah, absolutely.
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  You know, we've shifted even further up in the quality spectrum, you know, really
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  looking to back these companies with real pricing power,
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  resilient cash generation, strong ratings, or even just outright explicit support,
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  because spreads are quite simply
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  just too tight to be compensated for taking additional risk by stepping down
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  the credit curve.
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  You know, we've seen...
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  Private CapEx, for example, contract private investment is structurally
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  impaired now, which really
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  reinforces the case for quality because you just don't want the cyclical or CapEx
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  dependent businesses in a soft growth environment.
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  And really, it's a relative value call, taking a lower yield upfront because
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  there's much higher certainty of capital
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  return versus reaching for that extra basis point.
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  So we've got demand from both institutional and retail investors.
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  remaining pretty buoyant, I would say, and that keeps spreads narrowing.
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  But given what you've said, it seems to me that someone's getting it right and
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  someone's getting it wrong.
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  Am I missing something here?
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  No, no, you're spot on.
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  I think there's a risk of mistaking the strong technical demand for a fundamental
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  or clear, clean bill of health.
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  You know, what we've seen is the concentrated bid really in a handful of
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  quality names, which marks or masks that
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  dispersion elsewhere.
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  You know, weaker credits, cyclical names, these names have left the public credit
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  market and are opting to borrow in unlisted
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  funding vehicles or unlisted loans.
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  And really, you know, in our view, credit, there is still room to compress, but we
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  think that that delta is
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  starting to slow now.
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  And there's certainly more room to widen if sentiment turns, which motivates for a
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  much more conservative
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  positioning because technicals can reverse far faster.
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  then fundamentals deteriorate.
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  You talk about levers that are available to you to manage your corporate credit
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  exposure.
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  There's three of them.
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  Quality, term to maturity, and liquidity.
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  How do you rank those?
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  Well, quality first, unambiguously.
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  Term and liquidity only really make sense once you're really comfortable with the
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  credit.
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  So it's important to get the sequencing right.
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  If you get the quality right, then you can decide whether or not to extend term or
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  sacrifice liquidity in the context of a
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  diversified portfolio.
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  And only on high conviction names.
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  We're in the fortunate position where we don't necessarily have to rely on primary
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  market issuance.
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  It's the benefit of scale that comes to the fore because you need quite a large
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  check to be able to stand at the front of the queue to source
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  that quality credit that's not available in the wider market.
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  You like the banking sector, Steph.
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  Why is that confidence coming to the fore?
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  Well, Lindsay, you know, we've seen some rating upgrades across the whole coast and
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  up coast, you know, Fitch moving to AAA.
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  We've seen consistently oversubscribed subordinated debt, tier 281 and FLAC
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  issuance.
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  Why we like the banking sector, you know, the FLAC build out improves the resolution
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  framework.
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  There's disciplined regulation in the sector, diversified earnings, proven
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  access to capital markets through volatility
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  and really strong capitalization.
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  You know, our move has most recently been rotating out the curve on bank sub paper,
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  you know, really having strong discipline
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  not to sit on expensive paper and extending term where visibility is
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  deepest, not necessarily just reaching
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  for yield.
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  Going from banking to state-owned enterprises, SOEs, how do you approach
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  lending to them?
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  It must be a completely different approach to, for example, the banking sector that
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  you've just described.
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  Are you insisting on certain guarantees?
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  How does it work?
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  Well, I wouldn't say government guarantees are a blanket rule.
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  It's more an organic outcome of our credit process.
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  Fiscal pressure shows up in weaker standalone SOE financials.
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  This is pretty clear from some of the weaker municipalities which have been in
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  the press of late.
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  It's a good example of it.
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  You know, naturally, we've shifted our book to more government guaranteed
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  exposure.
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  We're acutely driven by that question on are we being paid enough for standalone
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  risk?
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  And increasingly, the answer is no, just given some of the latent risk in these
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  entities.
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  We are constructive on the higher quality ones, you know, just given the critical
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  role these entities play in the South African economy and the
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  services they provide to South African citizens at large.
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  Taking everything you've just said into account, could you just broadly summarize
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  what your positioning is at the moment at 91?
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  Look, we're in the higher quality range, a strong preference for quality, a
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  preference to take larger positions to higher
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  quality, high conviction names, and less conviction to take smaller positions to
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  risk chasing that yield.
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  So we're constructive on the banks and the financial sector, constructive on the
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  insurance companies, government guaranteed SOEs,
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  as well as real estate.
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  Very final question, please, Steph.
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  Is there any historical evidence that perhaps the SA corporate credit market is
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  a lead indicator for the
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  economy?
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  In other words, if it's doing well, then the economy follows.
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  No, I think what you need to see is that private CapEx spend.
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  You know, you need to see business confidence return and PMI improve.
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  And what we've seen is soft PMI and soft private.
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  So I think what we're seeing is...
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  Companies with low gearing and quality balance sheets continue to exist.
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  But until these companies start to expand their balance sheets and grow, you're not
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  going to see the GDP growth come through.
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  So, you know, it's almost a self-fulfilling.
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  These companies need the confidence to invest.
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  And with that comes growth.
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  Steph, thank you very much for your insight.
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  Steph 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.
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  organization, employer, or company
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  change, revision, and
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  rethinking at any time.
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