Episode Transcript
[00:00:00] Speaker A: This episode of Ghost stories is brought to you by Satrix, the leading provider of index tracking solutions in South Africa and a proud partner of Ghostmail. With no minimums and easy, low cost access to local and global products via the SatrixNow online investment platform, everyone can own the market. Visit Satrix dot co dot Z for more information.
Welcome to this episode of the Ghost Stories podcast, and this episode features Niko Katzke of Satrix. Niko, we've done so many of these. I enjoyed the every single one with you. We seem to be in a bad habit lately of starting the podcast late, because we just enjoy catching up before we actually hit the record button about everything from both of us being swept away by the weather through to a shared enjoyment of poker that we just discovered. So we might have to act on that at some point. But of course, we are here to talk about the markets, which is kind of like poker at scale, because there's lots of maths, there's lots of sentiment, there's lots of understanding what other people might do. So I suppose I'm not shocked that we both enjoy poker as well.
[00:01:01] Speaker B: Absolutely. So I'm an equal part a fan of poker and chess.
[00:01:04] Speaker A: Yeah, that's another thing I like, is chess. I used to play a lot of that, and I think it is the same way of thinking, honestly.
[00:01:10] Speaker B: Yeah, well, chess, a bit less so, because I think the rules of the game are fixed in chess. And so that's why you see computer algorithms corner the chess market, where with poker, there's so many moving parts, and it's a psychological game. You know, investments is a bit more like poker. I think that's more reflective of the markets, actually. There's a lot of sentiment driving returns and movement, and it's not a fixed rule game.
[00:01:31] Speaker A: It's very nice, actually. There's a risk element to both. But you're right, there's technically a right answer in chess, whereas there isn't a right answer necessarily in poker, not something that you can train a computer to know for sure is the right answer. Go run all these scenarios and away you go. So, yes, that's a good point, actually. I guess poker is closer to the markets, although it is amazing how many people I know in finance who spends a lot of time in their lives playing chess. So, you know, if you ever wanted your kid to get into the markets, you could definitely do worse than put a chessboard in front of them, or perhaps poker cards. But I think one is probably in the parenting handbooks and the other one is something you do a bit skill and when maybe your spouse is not 100% keeping an eye on what you're.
[00:02:09] Speaker B: Up to, I suppose, I suppose. But the same algorithms that have cornered chess, you know, if you apply them in poker tournaments, they actually end sort of mid table.
They don't beat seasoned poker players. And I think that that's the key. Sometimes a suboptimal move is the best move. And, you know, when it comes to, or objectively suboptimal, if you can't even define any move in poker as such. And I think that's part of the market as well. You know, sometimes you might do something that, in hindsight, probably wasn't the best move, but it turned out to be okay. And, you know, dealing to live with your decisions just makes life that much easier.
[00:02:42] Speaker A: And there's a lot of luck, and there's a lot of luck in the markets as well. I mean, this morning in Ghost mail, I literally wrote about how this rally on the JC has given pick and pay this incredible get out of jail card. Not only have they not had load shedding to deal with for the last three months, but they've also now had this market rally as they're about to do their rights offer. Look, that makes a bigger difference to pick and pay shareholders than it does to the company. The company raises 4 billion rand regardless. It kind of just hurts shareholders more if the share price is lower. But later this year, they're planning to unbundle boxer and sell down a piece of that stake. And obviously you want to be selling an asset into strengthen, not selling it into weakness. I mean, that's markets 101, right? Is you want to sell high. You can't sell high if sentiment is poor. And of course that's when the story of the second quarter in South Africa on our market is sentiment. And it's all been driven around what's happened with elections. It's been quite something to watch if.
[00:03:37] Speaker B: We take a step back. It's almost as if the markets had an enormous sigh of collective relief that we had following the election. If you think just two months ago many were predicting the worst possible outcome for markets of ANC EFF alignment that was almost going to materialize. And I think a lot of people, their anxiety became clear and it reflected in the prices of assets instead. After the election, we had a splintering off of the least market friendly and radical elements from the ANC, I suppose, and a merger of parties that are in my most optimistic take of the situation, at least hoping to steer the country away from further economic erosion. And so, you know, you don't want to give credit where credit's due, but, you know, if you want to be overly optimistic, you might say that Cyril has been playing fourth dimensional chess and has seen this well in advance. You know, and with. With the. With the radical elements splintering out of the ANC, you can to some extent argue with some of the more populist elements or hard left leaning, and some corners corrupt elements of the ANC have splintered off again. And what you're left with is a more centrist, market friendly, pragmatic ANC that's willing to negotiate. Because what we need as a country and what democracy needs is for there to be a coming together of different views and acceptance of different views. And in order to steer this economy forward, we all need to pull our weight. We can't be saying one part needs to pull and another part shouldn't pull or shouldn't be involved in pulling. I mean, that's no way of talking about it. And if ever we can get any inspiration, it's from our rugby team that just everyone pulls in the same direction. The eye on the prize. And once you start unifying things, it's a powerful force. And that's why I'm so glad that the new government has unification in its name. And let's hope. Long may it continue. Long may it continue.
[00:05:25] Speaker A: I love that you raised the Springboks there. Sears tackle, which will forever go down now, is the cause of us needing visas to go to Ireland.
The sort of jokes on Twitter around the rugby, always great. And everyone talks about Rasi playing 4d chess. Maybe President Ramaphosa as well, I don't know. But either way, I'm happy with the outcome. You know, I'm a diet in the world capitalist, and I firmly believe prosperity for everyone comes from markets that are working. And, you know, unfortunately, there's a lot of populist views, you know, otherwise. And in my opinion, simple is you just have to look at the world around you, where are the most prosperous countries, where do the jobs come from, etc. Etcetera. So, obviously, we won't dive too deep into politics on this show. That's not really the mandate, although it's hard to resist in an election year, because unfortunately, markets and politics are linked. That's the reality. And if you don't believe that, you just need to go and draw a chart of our market and go and compare the first quarter to the second quarter. So, like I had looked last night at the Satrix top 40 ETF, it was up when I looked last night, 7% year to date, that's the return, excluding dividends. So that's for just over six months. So on an annualized basis, which is always a very dangerous thing to do, it looks fine. You would double that more or less, and you get to actually a decent return, certainly a lot better than we see, or that we've seen on an average year in the JSE for many years now. However, the first quarter was flat. The second quarter is where all of the magic happened, and there was this big sentiment uplift. Now obviously investors will look at that and say, well, you know, if you're not in the market, you can't get the upswings, you just can't. If you're going to sit back and be in cash all the time, then at some point the markets will leave you behind and you're not going to get these benefits, which is why people advocate for, you know, ongoing, steady investing into equities, into ETF's. You know, I'm a big proponent of that. Obviously this is a statics podcast and it sounds like I'm getting paid to say that, but I do this myself. I believe strongly in adding ETF's to your portfolio and doing it on an ongoing basis. At the very least, you should be maxing out your tax free savings every year into ETF. So you are really not, you're not playing 4d chess then you're really only not even playing 1d chess, but over and above that, traders, I guess, would look at this and say, well, you know, this is the kind of benefit of taking a risk based on events, based on outcomes, based on probabilities, based on looking at a market and saying, well, you know, South Africa was cheap and inverted commas, you see people saying that a lot, so have a punt on the outcome. Risk and reward, hey, that's how this game works. If you're not prepared to take the risk, you're not going to bank the returns.
[00:07:56] Speaker B: Absolutely. And I think to your point, the market is probably still cheap locally. A lot of these companies are trading well below what you would regard as international levels of price earnings or dividend yield multiples. However you look at it, it still arguably remains very cheap. And while there's been this run in the second quarter, to your point, I think a lot of these asset classes are actually flat if you just look at it on a twelve month basis. And so locally, I think there's a case to be made that local is again, lacker. It's probably a bit early to tell what the long term impact of this coalition government will bring to the south african economy and markets. Particularly if you think about it, oftentimes market participants are only asking for government to reduce bureaucratic barriers and allow the market to actually run. Ultimately, a sustainable economy is one where the government is not creating all the jobs the market is, and the market wants to create jobs. If you think about the South Africans that are here are passionate about their country, they want to live here. And I think when people want to live in a country, they want to raise their kids in a country, they want to long term be here. That's when they start to invest in a country. When there's uncertainty around the sustainability of our economic policies, government, etcetera, that's when people start to be hesitant for taking on long term investment. So I'm really hoping that this new government is a step in the right direction. I don't think it's going to be the end of our political woes completely. I think this might be a bumpy ride going forward, but at least we've left the bus station. At least we're on a path in most respects. I think most people will agree we're in a better place now than we were just a few months ago. I think that much is clear. And we're hoping for more favorable policies towards economic growth, streamlining, for example, of decision making and delivery of products and services, basic services that we all need for a functioning economy. The financial markets reaction has been favorable to this to date and over the last few months, and we hope that may continue.
If you look at the optimism, to your point, it certainly reflected, if you look at the ETF's, the Satrix Fini ETF, which tracks banks, insurance companies and other financial services providers, that's done phenomenally well. And you had a day after the election where, I mean, the banks rallied, what was it? Financials rallied 8% in one day.
[00:10:19] Speaker A: You've stolen my Sunday here, Nicko. You know, on my other screen here, you'll never believe it, but I just charted the Satrix. Funny, because I thought, oh, the top 40 is maybe not the best indication of SA Inc. Because it's full of rand hedges and it's full of this stuff. So then I looked at statics, indie, I'm like, yeah, maybe. But then I looked at Satrix Finney and I thought, okay, that's actually the best view on the sentiment trade. And well done to you for completely stealing my thunder. You are a good poker player. I can see it. I can see it.
[00:10:45] Speaker B: I called your raise and I raised the penny.
[00:10:48] Speaker A: My satrix EtF raise.
[00:10:50] Speaker B: Yes, but that's interesting, ghost, because if you take a step back and ask the question, because I think a lot of casual market participants will look at the top 40 holding and think, well, why haven't I seen the bounce in the top 40 that I've experienced in the Finney as an example? Have I missed the opportunity? Let's take a step back and unpack that. If you look at the top 40 index, there's a lot of global heavyweights in there. Your Richmonds, your bulletins, your Naspers. These are companies that derive the majority of their earnings from offshore. And so the strengthening rand, in many respects, is actually not great for their nominal valuations. Think of a Richmond. If you're selling luxury goods overseas and you're repatriating dollars and euros and yens and the like back into Rand, well, a stronger rand simply means those returns are now against you. And so what you want with those companies is actually that the rand weakens so that your dollar is worth more in randoms. And so the interesting situation is the top 40 is much more of a rand hedge. If you compare it to, for example, the Finney, which is a rand play. Let's think that through. If you look at your financials, your banks, your insurance companies, etcetera, well, they are effectively lending out money in rand. And so they are being paid back 10, 15, 20 year loans, what they're getting paid back in rand. And so if the rand strengthens, then those debt liabilities are worth more today, if you discount that, back to today. So you want the. For banks, you want the rand to be strong. A weakening currency simply means that the value of your future returns in any neutral currency compared to the dollar or what have you, is always going to be worse off. And so what's good for the rand is good for the banks and the industrials and financials and the like. Well, the financials specifically. But you'd also hope longer term for the industrials, too. So definitely, it matters which one you had in your portfolio. The rising tide lifts all the boats, but in this case, some boats were lifted a bit more.
[00:12:46] Speaker A: Yeah, some boats are in the right part of the harbour to get that tide. Absolutely. And, of course, the other thing with the banks is credit loss ratios. If the economy is going to do better, then you hopefully will see a better credit performance ultimately, which does wonders for margins. And you also see more activity, you see more non interest revenue coming through, which is a wonderful boost to return on equity. So youve raised that point there on the strengthening rand and the level of rates that the banks can earn. And I think that brings us neatly to this concept of a carry trade, because we have a situation where South Africa is a nice high yield economy. And it's been that because people have priced in a significant amount of risk, and why wouldn't they? If you look at the economic track record over the last ten years, and as much as populist politicians want us to believe otherwise, and like to tell long stories about the markets, very few of which are true, people don't give you money because they feel sorry for you. They invest in you because they believe you're going to give them a risk weighted return. And if you carve out a country that is riskier, your cost of borrowing is going to go up, and your ability to invest in your people in South Africa is diminished. Your ability to do infrastructure, your ability to service debt, all of this stuff. This is the uncomfortable truth that populist politicians don't want you to understand, and it's certainly not going to explain nicely, but that carry trade is an important point to understand, because from a bank perspective, that's part of it, really. They're earning great rates on what is now seen as a more stable economy. And so the banks are then worth more than they were a few months ago. Theoretically, the rand is now offering a great yield on what people believe is maybe a more stable economy. Is this the kind of stuff that leads to us eventually being able to do rate cuts, maybe even beyond what is happening in the Fed? If our risk weighting comes down, can we cut deeper and then stimulate growth accordingly?
[00:14:34] Speaker B: There's two interesting elements that you raised there. The first is the carry trade phenomenon. The second one is what might likely happen to rates toward the end of the year. I think let's first talk about the carry trade. And it's such an important feature. We did some research a number of years back, following renegade, and the puzzle at the time was clearly our government was in a shambles. They were a grab for public resources and sustainability of our political sphere. At the time, Washington, very dubious. And a lot of, you know, there should have been a lot of strong alarm bells. And to your point, you know, no one is nice out there. If foreigners see the investment case for South Africa not being there, they're just going to extract their money. And at the time, the rand weakened a bit, but not to the extent that you would expect if an emerging market, another emerging market, were to fire their finance minister, install someone, and then the Monday again fire bring in someone else. I mean, that level of shambles in managing the public purse should have sent the rand into a deep spiral. And so the question that we asked after the fact was, why didn't the rand blow out far more? If you look at other emerging market economies, all our peers on the global stage, some of them have far larger economies. Think of your brazils, your Argentinas, your turkeys. I mean, their currencies blow out a lot. And we complain when the rand goes from 17 rand to the dollar to 19 rand to the dollar, and we all feel so much poorer, so much worse off about life in general. But have you ever seen the rand go from 17 to 50 to the dollar? You don't see those type of blowouts. And the question is why? Why don't we see these extreme currency fluctuations? I know the rand is volatile, absolutely, but the level of swings is actually comparatively muted. If you look at some of our emerging market peers. And what we found is that a large part of this is actually due to this carry trade that is implicitly happening in the market. That's always easy to see explicitly the level of this. It's not sort of reported by Bloomberg. You can see the level of carry, but you can imply it, and you can see how there is a lot of flows happening. So let me take a step back and explain what is carry trade? To give your listeners a sense of why I remain optimistic that the rand will not blow out to 25 30 rand to the dollar. And I've been saying this for years. So you can think of carry trade very crudely as using cheap money to buy higher yielding money. Okay, so basically what this means is that investors take advantage of interest rate differences between countries by borrowing money where rates are low, like, for example, the US or Japan, and then investing the borrowed money in countries where interest rates are high. So if you take, for example, an investor that is able to borrow money in the US, where the current ten year bond yield is at, what's it, 4.3%, and then use that money to buy ten year SA bonds that yield above 10%, so you're borrowing at four, call it 5%, and you're borrowing at 5% and you're buying at 10%, or you're earning 10%. So that 5% interest differential is in your favor. Now, of course, there's no free lunch, right? And this strategy's success is definitely dependent on an investor's time horizon and entry and exit points. So of course, this is a very active trade, and it's a. It's a risky trade, but it's a potentially very profitable trade. Now, this trade of borrowing in us and investing in local or SA yields that are 5% higher, this trade only makes sense if the rand does not weaken by more than the 5% interest difference.
If it weakens more. So let's say the rand weakens by 12%. That means, yes, you're earning that 5% yield difference, but you're getting back rands that is now 12% weaker. And so then you lose 7% on your investment. And so if you can time it well to actually enter this trade, and if the rand stays more or less flat or even strengthens, that will all go into your favor. Now, the fascinating thing is that the attractive carry prospect is such an important feature for our local currency, and one that I would argue likely has saved us in the past from larger blowouts that are typical of other EM currencies. Now, the reason why South Africa or the rand, is so well positioned for taking advantage of this character, or at least they being demand, when the rand weakens.
The reason for this is that we have a very deep and liquid bond market, which means investors can easily access and offload these instruments. So if you're able to invest in south african bonds, but you're equally able to tomorrow sell it, if the rand, for example, goes against you, well, that means you are more willing to enter into a carry trade. You know, years ago, turkey just simply banned or imposed capital control. So you weren't able to expatriate your lira earning debt instruments back into your original currency, which meant you had to sit through the currency weakening. And so if you're not able to offload those instruments or access it easily, well, you're not going to enter into a risky carry trade. And so part of why we have such a deep, liquid and trusted bond market, as an example, is because we have strong and credible central bank and financial institutions that exude confidence in the market, and that the more radical forces that oftentimes speak in the political spheres have not been able to capture those institutions. And so the market believes that. The market trusts that. And so the combination of all of what I'm saying, maybe if you re listen to that and just think about this interesting phenomenon, a very important feature at the center of all of that, or the correcting feature that you have, is if the rand were to weaken tomorrow, let's say it goes from 80 rand to the dollar to 21. Market participants look at that and they say, you know what? The odds of the rand weakening further has now greatly been reduced. So this carry trade is becoming more attractive because the rand will likely go back to call it 1918 rand levels. And so what happens then is when the rand starts to weaken, it moves outside of that bounden. You start to see market entrants buying up rands buying these instruments to make that carry trade possible, which then pushes the rand back into that 1819 rand level. And so you have this almost natural correcting force from the carry trade investors that actually just push the rand back into a more realistic level, if you like, in air quotes. And so thats a very important feature of our local currency is that it is so liquid and so easily tradable, and our bond instruments are credible that this actually supports the currency to the point where you don't see wild swings. And I'd argue we should defend those critical institutions because that certainly defends the currency.
[00:21:12] Speaker A: Absolutely. So we've covered equities, we've covered the rand. So that pretty much covers it off in terms of the big stuff from a south african perspective. And I would encourage people to actually go have a look at that satrix government bond ETF that I've done a couple of shows on with Sia. Go and draw that chart. STX gov pretty interesting. Obviously, that's rallied beautifully as well now with the improved sentiments. So there's many ways to, to play this game, ultimately. But the one, obviously, the one thing that is still in the back of the mind of the bears among us, really is, you know, there was great excitement once upon a time when a gentleman named President Cyril Ramaphosa went and had a walk on the seapoint promenade and there was mass celebration, and everyone thought this was wonderful. And then we went into a very tough period. And yes, Covid did not help anyone. So, you know, bank that. We're not exactly a super tech focused economy. So it's not like we got the upswing of cloud computing. We really didn't. All we did was we got absolutely smashed by the downward moving tourism over that time. You didn't want to be a tourism economy, you wanted to be a tech economy. And we're not one of those. So fair enough. You know, but either way, I think we can all agree that it was a very disappointing few years economically. I guess we just have to hope that doesn't happen again.
[00:22:21] Speaker B: Right?
[00:22:21] Speaker A: Because otherwise, so many of these positive swings we've seen, they're vulnerable. They're vulnerable to bad news. And I think if we start to see any kind of just reversion to populist politics or just non market friendly policies of any kind? I guess this unwinds very quickly. Right? That's the risk.
[00:22:39] Speaker B: Absolutely. So you can, if you're pessimistic, you can argue that, you know, the Ramaphoria has given way to Jin euphoria, which is now all the rage. Right. The market is loving this. Certainly there's a renewed optimism around South Africa's future and you might look back and say, well, we had that euphoria when President Cyril Ramaphosa walked on the promenade. But the reality, I think, and why I'm more optimistic this round, is that a lot of those bad elements from government have been removed. And this is why I say that if you don't want to give credit where it's not due, but in truth, when Cyril Ramaphosa took over the government or took over the presidency back then, you had a lot of those bad elements still firmly entrenched in the governing party.
This was. It's almost like fourth dimensional chess. Those bad elements have arguably splintered off into other factions and have now left the chat, if you like. And so what's left is parties that are wanting to negotiate, parties that are wanting to find common ground and move forward. And so hopefully, this round, the presidency will see the opportunity and seize the opportunity to actually take this optimistic view to their advantage. Because the optimism we had then was offered an extremely low base. And you can hopefully, I think, comfortably say that we've reached rock bottom in the past few years and we are on an upward trajectory. It's very hard for me to imagine how we turn back from here into the levels of poor service delivery and government, the very poor radical master nations. But you know what I mean, it's very hard to actually reverse those gains. I think we've made in terms of optimism in recent two months, I'd say, post the election, and long may that continue. Look, and I think we all just want a better economy. We all just want to move in a positive direction, create jobs, because government can't create jobs indefinitely. It can't be the main source of job creation. It has to come from the public. And the public is wanting to pick up the pieces and put back together, I think a fantastic economy and we have great companies, we have world leading companies in many respects. Hopefully they get the opportunity now to actually not be pulled back by bureaucracy and the red tape we've seen in the past, but actually just look to the future and flourish. That would absolutely be my hope. And so let's hope this GN euphoria may continue. And optimism is a powerful, powerful thing.
[00:25:13] Speaker A: Okay, so before we end off the podcast, I just have to temper all the south african enthusiasm with a year to date chart that includes the S and P 500 and the Nasdaq 100. Now, obviously, timing is important, and we can debate all day long about what will the next five years look like, how expensive are the markets, et cetera, et cetera, et cetera. But I think we can also agree it's been a strong year so far for south african equities, or rather a strong quarter, really. Now, admittedly, I was comparing here to the Satrix 40, which is maybe not the best comparison as we've discussed, but for a lot of South Africans looking for just broad market exposure, that's the button they hit. Correctly or incorrectly, they hit such 40. Now, the statics 40 as of last night was up 7% year to date s and P 500. So I've done the feeder fund, the Satrix feeder fund. So these are all Satrix products you can go and invest in right now. So this takes the S and P 500 return, and it turns it into rands. So we are comparing apples with apples here because we're comparing to the Satrix 40 in Rands S and P 500 year to date, 16%. And then the Nasdaq 100, obviously powered by all of the stuff around AI and Nvidia and blah, blah, blah, blah, blah, all of the tech stuff, up 21% so far this year. So interestingly enough, despite all of the sentiments and everything else, if you're coming to this year and you said, okay, I'm going to have a punt at my local market index, I think we're going to have a great year. Yes, you'd be doing pretty well year to date. If you annualize the Satrix 40 return, it looks good. But then you look at the overseas stuff and you've got to just remind yourself, we can all get very excited about the Springboks and everything else, but we are not sitting in an economy that is changing the world right now. And unfortunately, we're just nothing. And there's something to be said for diversification and making sure a portion of your money is sitting in those tech companies that will change the way we live for the next 20 years. We've got some great companies in South Africa, but not many of them are going to change the world over the next decade.
[00:27:09] Speaker B: I agree more. And if you look at the performance of those global indices, a large part of that is due to tech really coming to the fore and markets pricing it as here to stay. And like we've said on previous discussions, you're in the infrastructure development phase. So there's a lot still that needs to happen in terms of investing and spending before we actually see broad market application. And so what's the space? I think your large companies potentially a lot more Runway to actually improve earnings going forward, even off the current high base. Something to maybe consider as well and curve our enthusiasm is if I, if you look at the ten year bond yield today, it's still higher locally than it was at the beginning of the year. And so yes, there's been optimism, but that was, like I mentioned, off a very low base, almost off a default assumption that the worst possible outcome will happen in the election. So yes, there's been sort of almost a euphoric signal from the market. But clearly the market is not saying we are completely out of the woods yet. And so this might be a good opportunity to look longer term and reason for yourself whether you think we're taking a step in the right direction because it's not completely priced in yet, I think the market is cautiously optimistic. In South Africa. It might also be a great opportunity where the rand is a bit stronger, perhaps currently than it was a month or two ago, to get some of that offshore exposure with the rand being a bit stronger and build that exposure. For me, that is absolutely a dollar averaging exercise. Investing in MSCI World or S and P 500 or Nasdaq, you shouldn't be wanting to time it because these are volatile indices, make no mistake. And so you want to average your entry, let's say you want to invest 100,000 rand into s and P 500 instead of doing it one shot, pressing the button, maybe stagger that investment in over twelve months, 24 months. That's what I mean by dollar averaging, and build that exposure so that you build that exposure through the market cycle. That's always the ideal when it comes to investing long term, is building exposure, not timing it, not sort of jumping in when you think that the timing is right. But yeah, absolutely building that exposure. And you know, another asset class you haven't mentioned is the SA listed property index, you know, which is up handsomely here to date, I think just, just more than 10%.
[00:29:24] Speaker A: My personal little favorite. My personal little favorite for a new dawn with a g, actually. So yes, it's an interesting one. I mean, it's something we discussed on magic markets recently as well. I think that's not a bad place to play. What's happening in South Africa. I really do, especially in a tax free savings account. Get the yield tax free on these reits.
[00:29:44] Speaker B: You know, that's a very high duration call if you like, if you want to make a comparison to bonds or very high beta SA Inc. Play. So either way you cut it. You know, the local property market probably stands to benefit the most from a more stabilized government improved public services delivery with rates coming down perhaps towards the end of the year. If you look at the Steffi currently, versus on a three year basis or rolling three year and a rolling twelve month basis compared to the same for inflation, you are starting to see that real yields are picking up. And so this is creating room for the central bank certainly to start cutting rates from a real yield perspective. That's breaching the 2% longer term real yield level again on a rolling basis. So we prefer to look at those things on a rolling basis. You don't want to look at it just at a snapshot, but you want to sort of look at that trend. And certainly there is, you can almost safely say definitely more Runway for the central banks to start cutting rates locally, but we'll probably take our cue from the Fed there. I'd be very surprised if we start to move out of lockstep with global central banks. It's always possible, but I wouldn't think we would be too enthusiastic about doing that. But in all likelihood, it seems like the Fed will start cutting rates at some stage this year. And once that starts to happen again and yields start to go down, that's just great for property again, and it's going to be great for financials as well. And all those companies that stand to benefit from your discounting rate going down, because as we've said on this podcast before, you and I have discussed this, if you look at interest rates long term, especially the sort of ten year plus interest rates, they're a great proxy for what the market uses to discount future earnings back to today's levels. And so when interest rates go down, that simply means you're discounting at a lower rate. So that's good for properties from that perspective, because those indebted vehicles that use debt to acquire property now that debt is looking far more manageable. And so you're discounting future earnings to today at a better rate, at a lower rate. And so in your price, that's being reflected as well. So looking ahead, I'm very cautiously optimistic. You know, you don't want to, you don't want to peg your hopes on uncertain outcomes but like in poker, you have to play the hand, you have to play the hand that's dealt. And I think currently we're sitting with a good hand compared to a few months ago. And so I'm looking forward to playing this hand and seeing how this plays out. And cautiously optimistic. The. The table is turning.
[00:32:16] Speaker A: So, Nikka, I'll end off by saying on the interest rates on the banks, I guess you got to be careful that as rates come down, their net interest margin normally contracts as well. So they benefit from the valuation curve effectively, but they actually generally suffer a bit of a knock to their earnings. And that's why I like the property companies so much, because not only do they benefit from the valuation curve, but their expenses go down because they are the most highly geared assets in the world. Right. You're sitting with, you know, typically a 40%, 50%, oh, that's a bit high, like 40% loan to value and that money is going to the banks. So, you know, that, that's my, that's my favorite play. But I think where I want to end off is to actually say, you know, this is where ETF's are just so interesting. These thematic instruments that are low cost, easy in and out, highly liquid, available in your tax free savings account and let you express a view on the markets. All kinds of interesting views. Don't make the mistake of thinking ETF's or some boring top 40 debit order only that stuff's important. But you can do so much more with them as well. You can go and take a view on property for this year or whatever the case may be. And that's certainly my favorite thing about, about the ETF's. And Satch has such a wide range of them, so go and check them out. And Nico, thank you as always for your time. It's been another great discussion. The time goes so fast and I just always enjoy having these chats with you.
[00:33:33] Speaker B: Absolutely. And I think, you know, maybe, maybe just one last point on the banks. You know, that margin point you make is absolutely valid, but there comes a point where its actually hurting you because your creditors are really struggling to make their payments. And what you see is in an economy where interest rates are very high, especially real yields are very high, you do see a lot of people renege on their ability to make those payments. And so thats also when banks start to get in trouble, is where a lot of these loans become bad loans. And so hopefully with interest rates coming down, they are able to still preserve a healthy margin. Thats certainly still there, but at least your consumers are able to make good on their mortgages and the like. And I think that would be good for the banks as well. And certainly a more stable economic outlook will be good for banks. But I like the way you ended it. Absolutely. ETF's are a great way to buy diversified exposure. Buying single stocks. It's great fun and it's a great way to learn. But ultimately, when you're building long term market exposure, you also need to have that stable income generating asset that is well diversified, low cost, and delivers over a 510 year period. I think that's where ETF's are really great vehicle, but yeah. Thanks for your time and thanks for your great show again. Keep the good content in the morning. Coming through.
[00:34:46] Speaker A: Thank you Nico. I appreciate it. We'll do this again. Ciao.
[00:34:49] Speaker B: Cheers.
[00:34:50] Speaker A: Satrix Investments Pty Limited and Satrix Managers RF Pty Limited are authorized financial services providers. Nothing you have heard in this podcast should be construed as as advice. Please do your own research and visit the Satrix website for more information on all their ETF products.
