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