You're listening to Strictly Business Podcast with Lindsay Williams. South Africa has been in the spotlight and for two reasons, one intensely local, one intensely international. With me is Malcolm Charles, Portfolio Manager at 91 in Cape Town, to discuss two events. The first one, Malcolm, is Budget 3.0 or 3.0. And I think one of the reasons that there has been three attempts at the budget, or there were three attempts at the budget, third time successful.
is because of something called the GNU, and that's the Government of National Unity. It wouldn't have happened without GNU, I don't think. Yeah, and it would have been a bit of a tragedy if we didn't have the GNU and a 2% VAT hike sort of snuck through, which I don't think was that well considered. And if you look at the budget 3.0, we haven't deviated a million miles from the first budget. No VAT increase, which is very good for the economy long term.
and we've still got a primary surplus, which is a good thing. We've still got the spending reviews that are going to be coming. So I would say it's not a bad outcome considering the sort of mess of the first budget that we could have had. Yes, and given the resources at the disposal of the Minister, I'd say this is a fiscally responsible budget and fairly well received, again, given the circumstances. No, very much so.
I'm all the pity that it took three attempts, but I suppose that's a sign of the checks and balances that we have now. got, which I think is a good thing for markets. It's a good thing for the economy and the country. And yeah, and also, I think we also forget how well SARS did. So, you know, some of the reason that we've got a fiscally responsible budget in the third iteration is because SARS collected more money than they thought they would. So their efficiency is a benefit in the fiscus.
And there's a good chance that that can continue as well. So we could get our debt metrics. down a little bit quicker than are budgeted for at the moment. Well, let's hope so. And let's hope that growth will allow SARS to do even more of a job in the future. And let's get to that now. What did they say about growth? What did they say about budget deficits as well? What were the metrics that came out of Budget 3.0?
Yeah, I think the important one is a slight revision down on growth from 1.8 to just above one and a half, which we think is... Probably doable considering the tariffs have been reversed a little bit or paused at least. And the one that I look at the most is the debt to GDP. So that was going to stabilize around 75, 76 percent. Because the denominators come down a bit, it's going to around 77 percent. So it's gone up a percent, which is around an era when you're around about that stage.
But the important thing is that it stabilizes there this fiscal year. Then it's budgeted to start coming down from next year. And the way they're doing that is with budgeting for primary surpluses for the third one in a row. So we've had two in a row now, and we are budgeted to continue that process, which is the only way you're going to eventually get that number down. And that's the one that the rating agencies look at, the foreign investors look at.
We need to get that number into the 60s. So the first port of call is to stabilize it. It looks like they're on the way to doing it, and then in the years to come, we should see that slowly coming down. Forgive the general nature of the next question, but while the budget doesn't seem to have created any more glaring problems, has it solved any problems? I think it's shown that we're moving in the right direction.
And a few points to look at is quite a bit of emphasis on spending review, which has been lacking for the last five to ten years, to be quite honest. There's been very little willingness to almost admit to projects that are not working. So at least this cabinet and Operation Bulandlela will get these spending reviews done and almost outside of parliament. So it's not the ministers that can sit on them.
I think that's the first very positive story, because if you have got a debt problem, the first you've got to do is look at your budget and cut back your spending. The second positive news was the focus on infrastructure spend. So just over a trillion rand is budgeted for the next three years. Now, if we want growth, we have to invest in the economy, invest into our roads, into our transportation, into our energy infrastructure. And that finally now is coming.
So we're not cutting back from that and sitting on our hands and hoping magically growth comes. We actually... investing in the broader economy. And that multiplier effect should start coming through from as early as next year. Very good. Now, whether it be for good or for bad reasons, whether it be reasons beyond South Africa's control and the authorities control, the fact is that inflation, Malcolm, is beautifully under control, I think, both at the CPI and PPI level. Fantastic.
This is a lot of hard work by the various governors, and I think the current governor, Lissete Kanyaga, can take a bow of being quite resolute on fighting inflation and fighting inflation expectations and sitting at, what, 2.8% and forecast to remain in the 3% for a good while yet. And average in the threes this year is a job well done. And, you know, there is now scope to start, you know, to continue cutting rates and yet still keep inflation expectations on the lower end of the target.
Yes, let's hope that rate wish of yours does come to the fore, because as we know, Lesech Kanyaga is a fairly hawkish fellow. But as you say, well done to him and his team. Now the international influence that we've had recently. And it was the Trump meeting. Sarah Ramaphosa, the president of the Republic of South Africa, went over to the White House to meet President Donald J. Trump.
And I still can't work out myself whether it was good or bad, whether it was some farcical dream, and eventually it's going to go away. But it's clearly not. What was your take out? I can't work it out, Malcolm. Yeah, I mean, it's a great question, Lindsay. And, you know, I've obviously had a couple of days to digest it and everything like that.
And Okay, it was cringeworthy, to say the least, that ambush was, I mean, no one's ever, I don't think any president's ever done that to anyone in the world before, where you say dim the lights, it was a proper TV production. But I think in the cold light of dawn, you know, the president and the ministers that were with him kept their cool, and the golfers and the businessmen were there. I think put on a reasonable show for South Africa.
But the way I look at it is essentially the president went into the Oval Office and took cuts for us. It's like he took all the punishment on his shoulder. He was the one that was sort of ridiculed a little bit in the Oval Office. But let's not forget, we got a trade negotiation started thereafter. If you told me three weeks ago that we were going to have a trade deal and a goer might be able to be salvaged, I would have laughed at you.
I would have said we are the last country that will even be entertained in Washington and discuss a trade deal. So if it means a little bit of humiliation, a little bit of cringe TV to get a trade deal started and hopefully signed in the next couple of weeks or months. then I can live with that because what that means for our export sector, what it means for growth is enormous. And just to put it in context, at the height of the Liberation Day tariffs, our growth was expected.
When we were going to get that 31% tariff, and the whole world was going to get tariffs, our growth was expected to be less than 1% in that environment if that had allowed to happen. That's why I think it was a better thing for South Africa if we come out with a trade deal after that bizarre meeting. Yeah, let's hope that the bizarre meeting is literally that and it was a moment in time for Trump because he does like to be in the limelight for all the sometimes wrong reasons.
And I think this time it was the wrong reason. But behind the scenes, let's hope that the trade deal in Ogoa goes well. We'll watch this space. What does it tell you about the health of the government of national unity? What does it say to the world? It probably says, OK, we had a few wobbles, but now we're nursing our way back to health. You know, like any sort of strange marriage, you do have a little bit of a hiccup. We had quite a big one two, three months ago.
And I think both the smoothness of Budget 3.0 and this trip to Washington showed that Peace. There's renewed respect. There's renewed understanding of the power that the different parties have. And I think it's a lot more functional than it was. So once again, it's one of those things where as horrible as it was when we were having the potential breakup of the GNU, I think the GNU that's come out afterwards is a better animal. It's one that you will hopefully see the politicians engage.
behind closed doors a little bit more as opposed to shut their soapboxes and hence, you know, deliver a little bit of a better service to the country. Very good. Now let's apply all this to the markets. And if you could maybe give us a little summary of what's happened in the fixed income market year to date in South Africa. Sure. Nice and easy. It's been a crazy year. So the beginning of the year started with a lot of promise.
And then, obviously, as Trump's inauguration drew closer in January, everyone got very, very scared. So you saw bonds sell off. You saw listed properties sell off. Everything in South Africa had a torrid time. Bizarrely, what you did see is the RAND actually behaving quite well. that was on the back of a very weak dollar. So everything that we can invest in in our funds, unfortunately, was going the wrong way. You can't make money when all your asset classes are going down.
So it was a very tough time, and we had to maximize our income and protect in the portfolio, which we managed to do. Since the last month or so, we have seen a bit of consolidation and a bit of calmness. We've seen bonds recovered a little bit. We've seen a list of problems. the property recover, and RAM continues to be quite well behaved.
So I would say it's taken us four or five months for a little bit of better news in the market, and we are at a more constructive place right now than we have been for the rest of the year. Okay, that sort of starts to lead into my next question, and that is your positioning and your outlook. Maybe we should do the outlook first of all before the positioning. I want your view. on rates, on growth for the remainder of the year, and also then later on we'll throw in a round in inflation.
But rates and growth, if you would, to start with. Yeah, so growth's been tricky. It's had a couple of false starts. There are some green shoots in certain economies. You've seen the construction sector report that their order books are looking quite good. You've seen the logistics, little green shoots coming out of there. there was The Citrus Growers Association reported last week that their tonnages moved last month, were up 21% on last year.
So albeit that it is a lower base, but you are seeing these little improvements coming through. So growth, we think we can get around that one and a half percent that Treasury's targeting, we think is realistic and you are going to see an improvement on last year. Rates. We think that there's a rate cut coming. I mean, is it this week? Is it in July at the next meeting? We're pretty certain it'll be one of those and we actually favour it sooner rather than later.
The round is very, very interesting indeed. Sometimes I wake up and I say, that's got to be independent round strength. Other times I say, no, it's because the dollar's weak. But strong it is. Can it continue? History says no. Yes and no. So let's not forget that oil is at multi-year lows. highs, not oil, gold. And things like platinum are doing okay. Oil is at multi-year lows. So our exports are doing okay. Agricultural exports are expected to be pretty decent this year as well.
And oil, our biggest import is at multi, multi-year lows. So that alone supports our terms of trade and will support the currency for a little bit. And then on top of that, It depends on what currency you look at. And I think we need to shift a little bit and look at Rand, Euro, Rand, pound, etc. Because the Rand dollar almost gives us a false sense of the strength.
If you look at it against the other currencies, we're a little bit stronger, but not nearly as strong as we appear against the quite weak US dollar. Right. Now, you mentioned earlier on that you'd had a tough time because every single position that you had wasn't doing well. It had been a torrid start to 2000. and 25. Where are you now? Where are you positioned? And what's your outlook? Yeah, so at the moment, we started to move a little bit more constructive.
So we've added a little bit of risk to the portfolio. Our duration in the portfolio, we're above neutral. So we've got a slight long position in the portfolio, expecting that to do well for the fund. And over the next couple of weeks, we'll probably add a little bit to that. Listed property, we're more neutral. It's come back quite nicely, and we've taken a little bit of profit there. And in light of what I said about the currency, the lowest we've been for a long time in foreign currency.
We only had like 3.5%, of which 2% of that is in other emerging markets. So we do believe that the RAND will be stable at least, if not a little bit stronger in the near term. And what we did do is when we had all the volatility in the U.S., we added a couple of percent to good quality investment grade U.S. credit to the portfolio. So we're sitting with about 7% offshore credit, about 50% local credit. So trying to maximize the yield of the fund to give us a good overall yield.
But equally, we think there's an opportunity to make a little bit of capital gain with our allocation to bonds and property. So a better second half of 2025 than the first half for the diversified income fund is what you're cautiously saying, I think. Absolutely. Similar to last year as far as the bad first half and a good second half. Malcolm, thanks very much for your analysis and your time. That's Malcolm Charles, Portfolio Manager at 91 in Cape Town.
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