You're listening to Strictly Business Podcast with Lindsay Williams. Donald Trump, the 45th and now 47th President of the United States, has been busy marking his territory, stamping authority on his administration since his inauguration, which, let's face it, was less than two weeks ago. His latest executive orders have been arguably the most consequential, as tariffs have been slapped on key trading partners, notably. Mexico, Canada and China. And maybe the EU is going to come.
We don't know yet. But he's indicated that those tariffs will be forthcoming. And these have potential global consequences as supply chains are disrupted. But most recently, Trump has also targeted South Africa in a message on his own social media network. What did he say and what are the implications? With me is Gail Daniel, portfolio manager responsible for the managed strategy at 91 in Cape Town. Gail, we shouldn't be surprised.
Because historically, President Trump has targeted, and Trump not as president, has targeted Africa in disparaging terms in the past, hasn't he? He has indeed. He's targeted Africa more than South Africa in the past, I think. And, you know, this is interesting because he's going straight for us and he's going on. I mean, what he mentioned in the tweet was obviously the expropriation. which he didn't like.
And, you know, he used his capital letters to say it was unacceptable and that the US would do something about it. And I think it does raise, you know, several issues.
Firstly, with Scott Bessett coming in as Treasury Secretary, I think we were all hoping that despite him saying that America's going to have a green, amber and red traffic light system, depending on your behaviour, although we wouldn't have thought that Canada would be red, We were all hoping we'd kind of fly under the radar that, you know, we're being small would be of an advantage and he wouldn't target us. But I don't think we're going to get off on that.
And, you know, he said no more aid for South Africa. And obviously that is a problem because we are running a budget deficit about it's a very unproductive budget. But we're running it about as tight as we can run it, except perhaps we could. save money by not being in the Congo. And it looks like they're going to be five and a half million people needing ARVs, where perhaps that money would be better spent than up in Goma.
So he's come at us at a time where the government is desperately looking for capital. And now we're going to lose capital. I just want to go back to the wording of the message on his social media network, Truth Social. He talked about terrible things happening in South Africa and to certain classes. Now, I don't want to politicise this too much, but we know what he means. And then, as you quite rightly say, he's threatened to withdraw aid. Do you think he's going to go through with this, Gayle?
I think he could well. I mean, I think there are other things about South Africa that will irritate him too, which weren't in that tweet. For instance, the government's relationship with Iran, who we know is either public enemy number one or two for the US. So the market, interestingly, didn't think he would go through with the tariffs on Canada and Mexico. And you can see that by the reaction in the markets today. They thought it was all bluster. And he has gone through.
And I think we need to be concerned. And then you can ask. Well, is it in the price? You know, with bond yields at 10.5, where they were, you know, the last time our spread over years bonds was at these levels, and the RAND was at 19, our bonds were over 12%. We're now at 10.5. But that was going into the election, where we didn't know what the outcome was going to be, and we got the GNU, which was a more favorable outcome than the market anticipated.
But... I just think that, you know, 150 basis points is a bit kind for the bond market. So there's going to be more pressure there. Gail, what has been the immediate knee-jerk reaction after this Trump message? Well, we saw a bit of dollar strength. Actually, the yen held in. And then we saw the Rand, you know, test 19, go through 19. And we're seeing equities sell off in general. Because, you know, tariffs are not a win for anyone.
And with a lot of markets at very high levels, I think a lot of fund managers are just thinking, well, maybe we should take some risk off the table here. You mentioned that the RAND briefly went through 19 to the US dollar. What is the case for this becoming embedded? And the second part of this question is perhaps the RAND's too weak. I mean, admittedly, we've had a message from an incredibly important person, but has it gone too far?
Well, I think the answer to that question lies in what happened last week when the Saab had their press conference. And they stated that if tariffs had to come on, could see the RAND weaken to 21 to the dollar. Now, I don't think it was particularly clever of the Saab because, you know, don't give the market a target. But I think the RAND can get weaker, particularly in this environment, because we are so short of capital.
And. The government's answer to needing capital is, in inverted commas, privatisation. But you cannot say privatisation and expropriation without compensation in the same breath. Those two things are contradictory. Listening to you, Gayle, it just seems to me that the timing is a little bit inappropriate, actually. We've got the expropriation bill, and that's one thing which has caused concern to President Donald Trump.
Trump, then we've got the South African Reserve Bank comments about the RAND perhaps going to 21 to the US dollar. When it comes to the RAND, do you think it's independent RAND weakness that we're seeing and might see in the future? Or is it a combination of RAND weakness and dollar strength? I don't think we've seen very much idiosyncratic South Africa risk. You know, the RAND was kind of at 17 or approaching 17 in the final quarter of last year.
But that was when the years had been cutting, and it was when years-long bonds went from 4.6 at mid-year point to 3.6. So it was, and we had the GNU. So I think you had some idiosyncratic strength priced in, but in the final quarter of last year, you saw the dollar strengthen a lot. And I think the RAND weakened as a result of that. I don't think we've had, you know, much concern. I mean, last week...
We had a wobble on the canoe and then sort of they came out blowing kisses at each other or waving from a distance, whatever. And interestingly, the ramp kind of stabilized, but it never really strengthened. So maybe a little bit there, but not much. Here's a key question now, Gail. How are you positioned at the moment? And let me put this in two ways. Were you ready for the eventualities that we've just been speaking of and positioned accordingly? And if you weren't, are you repositioning now?
So, I mean, I like my companies to grow and I like growth. And I think markets like growth and capital goes to where growth is. So when the mutual fund that I ran, when that sector was allowed to go up to 45% offshore, I think it was two years ago now, I took the fund to 45% offshore. That is quite a differentiating position from peers. That has gone up.
with the outperformance of the S&P, of the local market and a bit of brand weakness we've had, to close to 50% where the peer group sits at 40%. And so I am positioned for this. I'm positioned for it on the basis that I never really bought into the SA growth story. I think we've had, you know, fortunately we got the canoe because all bets would have been off if we didn't. But... Going into that, I was also cautiously positioned. It could have gone the other way. It didn't.
We got the canoe, so that didn't help me in the near term. But longer term, I don't think much has changed. We have this canoe, which is perceived to be stable. One has to ask, you know, how will the DA react to these Trump tweets? Minister Montush has already said, well, we won't sell them our minerals then, which I don't think is perhaps the best answer. And I think we're going to see a lot more pressure on our side.
And we've seen earnings disappointments, you know, particularly out of the retailers, some of which put on 60% last year. They had absolutely everything under the sun going for them in Q4 last year, where, you know, you had the two-pot system, you had no repeat of the port problems, you had no load shedding, you had Black Friday taking place. after month end compared to the previous year before month end. And some of them are still delivered very poor growth.
So I was positioned with more offshore than my peers, with fewer SA government bonds, because until we create employment growth, SA is not a growth story. And we haven't seen that coming through. And that's why you haven't really favoured SA Inc. And let me put this delicately now. Are you anti-Essay Inc. or are you anti-Essay Inc. relative to the opportunities that are presenting themselves overseas with the 45% that you've spoken of? So, I mean, two points.
Firstly, I think if you came down from Mars and said how much of your portfolio would you have in South Africa, it wouldn't be 65%. It would be less than that. Secondly, some of SA Inc. is very expensive. And actually quite a lot of it is very expensive. You know, ShopRite's on 26 times. Clix is on 30-something times. That's more than Facebook and Google. First Rand trades on the same price to book as J.P. Morgan. With a similar ROE, but J.P.
Morgan does it all for 5% cost of funding, whereas, you know, First Rand does it all 10%. J.P. Morgan is a superior business. Next, in the UK, you know, is a lot cheaper than Fashini. So I don't buy this big value argument for USA Inc. I think there are some cheap shares, but they tend to be very small. So they're quite hard to buy. play.
So I would need to see better growth drives those valuation levels and that's the one thing that the US has had is that those companies grow very quickly so they de-rate nicely. And then I would need to see policy pronouncements which can support growth and there are things that the government can do. I mean it's interesting in an economy with 40% unemployment, we have this minimum wage. So you've got this COVID grant, which the government's trying to extend, of 350 rand a month.
You would think if you scrapped the minimum wage that people would be able to get a job for that. It's quite devastating. And then Eskom, where the government provided, I think it was a 250 billion rand bailout, a huge bailout, a year later... they've got receivables of 110 billion rand because the municipalities don't pay them.
Why don't they change the direction of cash flow so that the end user pays ESGIM who then pays a distribution fee back to the municipality and not let the municipality sit on it? And to think that they can come out and privatise those businesses and maybe the fund managers in their arrogance think that if they give the government money for that the municipalities will pay? Oh, it's a big question mark.
So there is stuff that can be done that would make me more bullish on SA Inc. But I think it's been given all the benefit of the doubt and the earnings need to come through. And so far they aren't. So what you're saying is your managed strategy at 91 in Cape Town is full steam ahead until otherwise advised, Gail. Gail, thank you very much for your analysis. Gail Daniel is a portfolio manager responsible for the managed strategy at 91 in Cape Town.
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