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The Asset Class: Malcolm Charles · Strictly Business

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  You're listening to
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  Strictly Business Podcast
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  with
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  Lindsay
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  Williams.
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  in your voice.
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  You really were enjoying what you were doing.
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  It was an enjoyable 2025, wasn't it?
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  It was a fantastic year by the time we got to December.
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  Obviously, a couple of wobbles in the beginning with Liberation Day and things
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  like that.
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  So the reason that we weren't enthused about the market is that finally there was
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  positive momentum in South Africa.
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  The reforms that have been implemented.
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  We were starting to take root, and we could see that the country was heading in
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  the right place.
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  And some of the horrible discounts that had been sort of lumped on South Africa
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  over the many,
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  many years was people were starting to talk about South Africa, that the discount
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  might start disappearing.
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  And as I said, a bit of a global risk in the beginning,
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  but then when we could focus on South African issues and South African dynamics,
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  the bond market did very, very well.
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  Yes.
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  It did.
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  I don't know how to describe it because I know how to describe a situation where
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  everything's going bad.
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  And over the years, you know, that's been quite easy with South Africa.
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  It's called a perfect storm.
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  I don't know what the opposite of a perfect storm is.
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  But anyway, we got it.
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  Maybe we could just briefly go back and you referenced Liberation Day.
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  That's when Mr.
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  Trump stood up and announced all these extraordinary tariffs on every country in
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  the world,
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  some that didn't even exist.
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  went to something like 11.1%, 11.15%.
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  Look at it now, pushing 8%.
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  Just a potted history of the year, please.
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  The year started with promise,
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  but then after the inauguration of Trump and he started making the noises very
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  aggressively,
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  basically picking a fight with the rest of the world.
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  And I think it was right in the beginning of April, he had his so-called Liberation
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  Day where, as you said,
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  he announced all those tariffs.
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  And in some of those equity markets, 10%, 15%, 20% negative.
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  It was a complete catastrophe.
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  Markets panicked, bond yields sold off, currencies weakened, and it was absolutely
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  crazy.
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  And then thankfully there was a bit of that taco trade of Trump always chickens
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  out.
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  And by the time you got to December, you look back and you go, what happened to
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  Liberation Day?
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  Markets were up fantastically well.
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  African bonds did over 20%.
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  Our equities did over 40%.
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  I think you battle to get anything below 15%, 20% if you were in an equity market
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  around the world.
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  Yeah, it was an amazing year.
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  And we've got to start with the basics.
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  We've got to talk about the U.S.
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  dollar because I remember speaking to your colleague in London, Sahil Matani, about
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  the dollar.
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  And he was of the cautious opinion that the dollar bear market had started.
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  It can go on for quite a long time.
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  So the dollar under pressure, and emerging markets benefited from that, Malcolm.
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  Very much so.
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  So everyone goes, oh, the rand is so strong, the rand is so strong.
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  Whereas when you unpack it against the dollar, look here, we were in the top
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  tier, I think.
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  But I think we were only like number 10 or 11 as far as the best performers.
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  The year where I coined it, anything but the dollar.
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  There were only about four or five currencies that performed worse than the
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  dollar.
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  Thanks to Liberation Day, a lot of investors actually decided to diversify
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  their investments and they went
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  into Japan, they went into Europe, and then as the year progressed,
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  started actually investing in emerging markets, equities, bonds, and our
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  currencies.
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  And many, many emerging market currencies and bond markets did very,
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  very well as a result of that capital flow into their region.
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  So it really was a diversification.
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  sort of away from the uncertainty that has now been created around the dollar.
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  Yeah, and this is not part of this conversation, but you can see the
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  diversification of, for example,
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  central bank reserves by the extraordinary performance of the gold price.
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  Solid terms of trade is one thing that keeps on flashing across my screen along
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  with others which we'll deal with in a moment.
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  But that's also been a factor, hasn't it?
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  In South Africa, that is.
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  Absolutely.
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  So we benefited from the diversification just into our normal markets.
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  But because the central bankers are doing the same thing, we export gold and
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  platinum.
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  And that's predominantly the gold is what central bankers are diversified into,
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  which is fantastic news for the RAND.
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  And we track our terms of trade growth every single morning.
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  So one of the first charts I look at.
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  And, you know, when I came back from leave in early January, I looked at it and I
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  said, guys,
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  we are going to see 15 rand something on the rand dollar because that's what the
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  terms of trade are telling us.
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  You know, we are lagging what gold price and platinum price has done.
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  And, you know, thankfully, the rand is starting to play catch up now.
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  Yeah, I didn't realize you did it daily.
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  And it must have been looking very good this morning after what has happened in
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  precious metals markets over the last couple of days.
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  What about inflation?
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  Inflation is another one.
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  There was an enormous development last year regarding inflation targeting, which
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  you'll mention, of course.
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  But inflation is under control.
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  What is it?
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  Three and a half percent, something like that, which is right at the bottom.
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  Yeah.
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  So we came out at 3.69 December after hitting 2.8-ish, 2.9-ish for quite a few
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  months,
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  what, third quarter of last year.
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  Completely under control, as you say.
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  It's Lesetia, the Saab.
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  and his MPC members have done a phenomenal job.
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  They've anchored inflation expectations,
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  they started talking about the lower target quite early last year
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  and then in November when the minister announced that the target is now around
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  3%,
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  expectations actually continue to fall.
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  So it's changing behaviour, it will make the RAN more predictable.
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  It should reduce volatility of the currency over time.
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  And if we look at high inflation forecast now, is the 3.6 that came out a week or
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  two ago.
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  That's the peak and now it starts coming down again.
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  And we've actually got inflation for 2026 averaging 3.1%.
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  So pretty much spot on the target level for the Reserve Bank.
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  Which all comes together.
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  along with the government of national unity and being removed from the grey
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  list, it all comes together to make
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  South Africa quite attractive.
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  And again, I remember talking to one of your colleagues in the Cape Town office
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  and he said he was getting calls from people, Malcolm,
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  that he hasn't heard from for a couple of years, introducers of business, advisors,
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  and saying, tell me about South Africa.
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  And he said he hadn't had that for so long.
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  It was very refreshing.
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  So South Africa, it was starting to become attractive last year.
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  It built momentum.
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  Can the momentum continue in 2026?
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  Yes, it definitely can.
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  Because as I said, with this inflation under control, what it allows is the Saab
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  to actually cut rates this year.
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  I mean, there's whispers they might start now in January.
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  I think by March we would have had our first cut comfortably and possibly another
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  25 basis points a couple
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  of months later.
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  So at least a 50 basis points cut from the Saab.
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  Then you throw in this, what people forget is the terms of trade are boosted by the
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  commodity prices.
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  But what also is boosted is national treasury because royalties and mining
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  profits start
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  jumping up quite aggressively, quite quickly.
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  And those numbers are not in the budget.
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  And a very conservative estimate that we have got is that we could easily see
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  around 100, 110.
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  a billion rand extra this year and next year collected by the FISCUS,
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  which is money that can then be used to reduce the debt burden, consolidate the
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  budget,
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  consolidate the debt to GDP.
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  And those are all the things that S&P, you know, you mentioned the gray listing that
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  we got cut off.
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  We've also got an upgrade from S&P.
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  Believe it or not, we had an excess supply of electricity in December.
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  too much electricity being produced by the same company that couldn't keep the lights
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  on three, four years ago.
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  So that's the turnaround that's happened.
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  So things are looking very good for us and we're on a solid base.
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  And if we just sort of keep things together and don't shoot ourselves in the
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  foot,
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  that positive momentum can start leading to better growth.
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  No longer the half That's for 2025.
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  And then 2026, there's no reason why we can't be ticking up towards the 2% level
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  growth,
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  which is well on its way to that 3% level that everyone knows we need to get to.
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  Yes.
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  And that company you talked about turning itself around and actually being able to
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  have an excess of electricity rather than a shortage of
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  electricity actually turned a profit as well.
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  Very good news indeed.
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  We have to look at the US economy.
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  And you talked about growth of maybe The growth of the U.S.
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  economy, well above 4%, which has surprised everybody,
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  surprised all the naysayers and also incredibly important for South Africa,
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  despite the rather unpleasant comings and goings between Trump and Ramaphosa.
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  But anyway, U.S.
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  economy looking very good indeed.
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  Malcolm?
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  I mean, the way I describe it is it's exceptionally resilient.
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  You know, it also had the sort of banana curve.
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  Yeah, like at the beginning of the year there was nervousness about inflation and
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  then
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  when Liberation Day came everyone said oh shucks we've got inflation and now we're
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  going to have a recession.
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  So it went into that real stagflation sort of expectation.
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  But then, quite rightly, the numbers started coming out and we saw that
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  inflation was actually okay.
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  Maybe a little bit higher than the Fed wanted, but nothing like to unravel the
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  economy.
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  And the growth was very, very good.
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  So it almost went into that block where we call it the Goldilocks, where it's not too
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  hot, not too cold.
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  And in that environment, investors like taking risk.
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  And when they like taking risk, emerging markets are the recipients of that.
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  So people go, OK, we're doing very well at home.
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  But you know what?
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  The environment's good for emerging markets.
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  Let's get some exposure in South Africa, in Brazil, in Mexico.
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  And that's exactly what they've done.
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  So while inflation remains OK and growth remains resilient,
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  the environment for emerging markets in general is very, very good.
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  And that's very good for us in South Africa.
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  I can understand someone looking at the Liberation Day fallout and saying Gosh,
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  the South African bond above 11%
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  the 10-year.
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  I wouldn't mind having a nibble at that and buying the bonds anticipating the
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  yield coming down.
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  But it's just above 8%.
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  Can it be done again?
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  Can it still be bought?
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  What do you think?
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  What is the outlook for bonds this year?
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  Yeah, so that is a very pertinent question.
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  And I think the straight out answer is do not expect a year anything like last year.
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  Last year was a lot of catch up of a lot of bad, bad...
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  pricing for South Africa over many years.
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  And as we slowly tick the boxes and fix them quite rightly, investors rewarded the
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  country.
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  Going ahead now, you look at the market and you go, okay, can it be done for a
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  third?
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  You know, two years that have gone pretty well.
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  Can we do a third in a row?
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  And the answer is our competitors have got weaker.
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  And what I mean by that is inflation and cash are the bond market's biggest
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  competitors.
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  And, you know, Lesete and Iago can cut rates.
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  So there's a very good chance that cash rates are around 6%
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  there and thereabouts by the end of the year.
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  Inflation is around 3%.
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  So suddenly that 8, 8.25% sort of rate that you're looking at is actually quite
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  attractive.
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  It's 5% above inflation.
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  It's 2% to 3% above the cash rate.
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  what the alternative is that makes them attractive from that regard.
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  Something's got to go wrong, Malcolm.
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  It always does.
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  Please, let me curb your enthusiasm.
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  It's all too much now.
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  No, no, no.
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  I am a realist and what we have done is we've started putting a couple of
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  protective strategies because there's not as
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  much fat in the market but you've still got to make an informed decision and try
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  and do the best you can for
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  clients.
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  But also acknowledge that, yes, at these lower rates,
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  let's just make sure that we have got protection strategies in so that if
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  something does go wrong,
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  we can actually protect the portfolio during that wobble or the risk-off sort of
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  phase that happens.
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  So I'm not naive to think that it's all going to be in a straight line, it's all
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  going to be hunky-dory.
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  But if you invest at the right time and take the right opportunities and take risk
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  off when it's actually run quite hard,
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  I think you will be able to give a reasonable return.
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  in a bond or income fund this year.
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  So you're happy about the prospects for the 91 Diversified Income Fund, in short?
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  Absolutely.
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  I think there are going to be moments when things can go quite well for it.
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  But then equally, I think the trick is not to be greedy,
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  take risk off the table when it's done well and wait for a better opportunity to
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  get back in again.
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  Malcolm, thanks very much for your time.
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  That's Malcolm Charles, Portfolio Manager at 91 in Cape Town.
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  and since we are critically thinking human beings, these views are always subject to
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  in perpetuity.