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In this episode of Ghost Stories, I was joined by Satrix’s Nico Katzke to unpack a global market that feels eerily calm in the face of rising risk. From Middle East tensions and the growing threat of energy disruption to the curious resilience of equity markets, the conversation explores whether investors are underpricing just how fragile the current environment really is.

With oil prices climbing and inflation risks creeping back into the narrative, this episode digs into what it all means for portfolios. From the outlook for South African equities and resources to the surprising strength in US earnings, there’s much to discuss.

Along the way, we tackled ETFs, market complacency, and whether concepts like “bubbles” even matter in a world being rapidly reshaped by AI and shifting global power dynamics.

In this episode:

• Why oil prices and the Strait of Hormuz matter more than ever
• The risk of market complacency in the face of geopolitical tension
• How energy shocks could drive inflation and hit consumers
• Why SA resources have surged – and whether it can continue
• The resilience (and risks) within US equity markets
• Stagflation risk and the long-term outlook for the dollar
• How ETFs can help navigate uncertain markets
• Why “bubbles” might actually be part of progress in innovation

Transcript:

The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. We took a little bit of a break with the Satrix team over the April period and all of the public holidays, but we are back in action now with Nico Katzke, Head of Portfolio Solutions at Satrix. 

Nico is no stranger to the Ghost Mail audience at all. 

Nico, I’m glad you survived the storms. I believe you had to do some driving in them, which is not so fun. And I’m glad you’ve been surviving the market storms this year as well.

Nico Katzke: The storm we had now in Cape Town, for those of you listening from other provinces, I’ve not seen in my 40 years on this earth anything to its liking. I must say, I don’t know if you can recall a time that was as violent a storm as this, eh?

The Finance Ghost: I joke, because every year I feel like I go through that whole phase in May of, “Oh, this is the worst Cape Town winter ever!”. And then I say it again the next year and the next year. But it does seem as though this was a pretty generational storm.

And we’ve seen some generational stuff in the markets as well, completely unrelated to the storms. Obviously that’s been what’s happened in the Middle East, right? So, the full impact of this conflict is – well, we’re not quite sure where it’s going to go yet. Oil is still very high. We’re starting to see the fuel price increases come through now. 

I’m starting to see more and more companies talk about inflation, and the risks to that story. Boxer is pretty hot off the press. They were talking about some sales pressure in this new financial year, versus where they finished off last year. You’re going to see this everywhere, I think, in consumer stocks.

And unfortunately, the US track record with getting into a place and getting out quickly is not amazing, right? 

Do you feel like this is going to be a $100-a-barrel story for a long time here? And do you think that they needed to actually do what they’ve gone and done in Iran?

Nico Katzke: No, look, that is the $40-trillion question. Let’s first start by stating the obvious. The impact on markets of a sustained energy disruption is absolutely enormous.

A few months ago, very few of us knew that Hormuz is… I mean, it’s not a chickpea-based snack that you put on a ciabatta, right? But it’s actually a crucial strait. Although, looking at it on a map, it’s actually more of a bend. 

But anyway. It’s ripe for Iran to hold hostage, and we’ve known this for decades. But the irony is that energy and geopolitical experts knew all along that attacking Iran militarily will likely lead to the closure of the Strait of Hormuz. And it’s quite disheartening that the Trump administration ended up getting into this quagmire in the first place, to be honest.

Supporters of the military incursion point to Iran being a terrorist state proxy, and a threat that needed to be dealt with. Which I, by the way, agree with wholeheartedly. Iran is a problem that needed to be dealt with. But I do think how you deal with the threat is equally important to whether you deal with it.

It’s almost like having a hornet’s nest in a crowded house. And we can all firmly agree it needs to be dealt with. But taking a cricket bat to it may not be the best course of action. It may actually bring more chaos and take away your ability to negotiate.

So, the fact that Iran needed to be dealt with is not, for me, a sufficient precursor to attacking it militarily, without a full, firm plan entering and exiting. I think this is where the US got it wrong.

But you know what’s interesting, Ghost? Markets have been more resilient, even complacent, to this threat. If I told you a year ago, we effectively have a stalemate in the Middle East, you’d think markets are on high alert, markets have plunged, etc. 

But the irony is, the Chicago Board Options Exchange’s CBOE Volatility Index (VIX index) – or the US equity market fear gauge – and we gauge fear by looking at the price of options; the price, effectively, of insurance on equities – that is back to longer-term stable averages, showing somewhat of a complacency in the US market in terms of fully pricing in this potential energy disruption.

Now, lest we forget, and it’s probably important to take a step back and say: our modern capitalist economies are absolutely built on the assumption of indefinite energy security and a stable flow of oil. We assume that is part of the base case.

The rollout of AI, as an example, assumes data centres have near-instant and continuous supply of energy to keep them cooled and running efficiently. We assume energy is always there. Any serious disruption in the supply of energy to power these facilities could prove completely disastrous for AI. 

Not only for markets, right? Everything ranging from food security, transport, really everything is affected by the price of energy. 

In my mind, this is definitely not an overblown event or kind of a minor nuisance in the Middle East. It is actually quite fundamental that the Iranian war ends in a sustainable manner.

Now, I don’t know if you picked this up, but what concerns me the most is that the CIA actually wrote an intelligence assessment on Iran’s resolve and basically their ability to withstand economic pressure, last week. And they concluded it is much higher than anticipated by the Trump administration.

This might mean that the Iranian position would be to stretch this out into the US midterms in November. Pressuring Trump to, somewhere along the line, concede, and allowing Iran to actually re-emerge with even more resolve and ability to influence regional matters. 

So that, for me, is a concerning irony. And it is for this reason that I find it interesting that markets have been more complacent in recent months. 

Because what we saw from the commodities global summit (I think it was in Lausanne, if memory serves) that’s a congregation of energy experts and commodity traders, and I kept a close eye on it.

And they painted a far bleaker picture about the possibility of a severe energy disruption if the Strait of Hormuz remains closed or partially blocked beyond June, July. Most of them (and remember, these are traders in energy markets, they’re very close to the coal fire) they are almost all, to a man, in agreement that a failure to open Hormuz by September would put us firmly in the squeaky bum or sweaty palm territory, or however you want to call it.

And so clearly, continued energy disruption would prove very, very costly indeed. In all, I think we are in for an interesting few months to come, which we can hopefully unpack today.

The Finance Ghost: Thanks, Nico, for putting ‘Strait of Hummus’ into my head. Now I’m going to have to try very hard not to keep saying that instead of Hormuz, but this is definitely not some delightful meal that you have along the Mediterranean.

And if you’re right, and if this thing could carry on until November, and who knows how much longer after that, then going to the Mediterranean is going to become very difficult. Because at $100 a barrel, this world doesn’t really work. 

The inflationary pressures are severe, and that is where discretionary spending essentially falls over. It becomes wildly expensive to do things like travel. 

As much as South Africa might win on certain resources that we have, the one thing we don’t have is oil. The one thing we do depend on, to a great extent these days, is tourism.

It feels like South African consumers are sitting ducks. And I don’t really see enough people actually talking about this. It does worry me, going into the rest of this year.

I think that South African retailers are downplaying it at the moment because they don’t want to create panic in share prices. But how can it not have a severe impact when heavily indebted South Africans, with a poor savings culture and who struggle to make ends meet, are now going to be spending so much more on travel? 

And in a country where public transport is not a great option for a lot of people, we don’t have a good public transport infrastructure. Certainly not for what I would call office workers and those who need to not necessarily go through the major transport hubs but get to the more arterial routes and that kind of thing. This is not Europe. We don’t have the ability to get on a train. 

And yet the All Share is fine, if I may say. Kind of flat on the JSE. Obviously, if we dig down, there’s a lot more volatility. 

But is South Africa, for all our faults and for all the concerns, and now all the noise around our president and everything else we deal with every day as South Africans: are we quite well positioned in this environment? Or do you think that we are underplaying the risks down here as well?

Nico Katzke: I do think there’s an element where I agree with you, that the full risk of energy disruption is not well priced. It does feel like there’s a lot of complacency. I don’t want to say markets should be freaking out and running around crazily, but there does seem to be some complacency, some assumption that we’ll return to normality. So, in part, I agree with you there.

When we talk about our local equity market, we need to take a step back and just ask: where are those returns coming from? So, if you look at the last year, the FTSE/JSE All-Share Index (ALSI) is up 30%. So, it does seem like things are back to normal, equity markets are running strong.

But a lot of the points that you raised around SA being a high-risk strategy, is already priced in. And so, when you look at the companies listed on the All Share, a lot of them are great companies with strong revenue, with good balance sheets. A lot of them are globally competitive companies and so have been underpriced or unloved, if you like, for some time.

Part of the rotation out of the dollar, and with global investors looking for alternatives, it is starting to seem like the SA story is looking a bit more attractive. You do raise a lot of concerns and risks, but the reality is emerging markets are looking more and more like the bastions of stability and democracy if you compare what’s happening in developed markets.

So capital needs to flow somewhere. Challenges and risks abound. Very few regions are looking safe and secure at the moment.

And so, if we return to our local equity market, as I said, the ALSI is up 30% over the last year up to end of April; resources are up 86%. That’s really the interesting part of our local equity market. It’s been the biggest driver of returns over the past year and a half.

But maybe just to add to that perspective, because if we can look at that and say, well, resources are up 86%, line went up, line must come down. That’s a very simple technical analysis of it. But the reality is, if you take a bit of a longer view, you’ll know that it followed a decade in the 2010s of virtually zero growth.

In fact, you made more money putting your rand in the fridge than you did investing in our local resource sector for much of the 2010s. So those patient investors that were along for the ride, following that lost decade for local resource stocks, would know all too well that resources are only now starting to catch up to other local sectors. And may actually have some space still to run.

So maybe taking a bit of a longer perspective there would be helpful. It’s also important to note that local resource stocks have changed fundamentally from a decade ago. You analyse balance sheets, and you’ll know better than anyone that I can think of, that a decade ago these were bloated, overly indebted companies that many analysts wrote early obituaries for.

I recall that one analyst report in 2016 that was so scathing and basically said, if you invest (and at the time this was one of our largest precious metals companies on the local exchange), if you buy this, you’re effectively just buying debt. It’s a call option that’s so far out of the money that there’s no point in even looking at this stock.

Since then, these companies have transformed their balance sheets, making some of these precious metals (and mines, in particular) profitable, money-printing machines at the moment. All of this bodes well for Treasury too, which has seen a big increase in tax revenues from local resources. 

And by and large, if you look at the local equity market for the next year or three years, the key question will be whether precious metals can remain elevated. And I do think there’s a strong case for that to be the case. For gold and other precious metals to still remain elevated. 

Especially in a world where you do see large institutional managers rotating their portfolios out of dollar-based assets, into commodities that can’t be printed; can’t be manipulated by governments.

So, there’s actually a very interesting investment case behind what’s driving the precious metals that we’re not going to have time today to unpack. But maybe in a future time we can actually make the case, if you like, for precious metals.

The Finance Ghost: Yeah, that would be good at some point. And obviously the beauty of buying ETFs is you can actually take this kind of sectoral view. You don’t have to go and pick a specific winner if you don’t want to, in gold or platinum, for example, or the likes of Sasol, Glencore.

You obviously can go and get single-stock exposure, and you can always top it up as well. But you can invest thematically through ETFs like the Satrix RESI ETF, where you could have gone and bought the Resource 10 index tracker, effectively. And you can do it in a tax-free savings account, and you would have banked some pretty serious returns.

But also, as you say, there have been some very dark times for the South African mining sector. It is a cyclical industry, and that requires quite a nuanced approach to investing. That is quite different to the “buy-and-forget” kind of approach that a lot of people prefer to use. And really should be using, because it just results in less damaging behaviour, less churn, all that kind of stuff.

But if you get the cycle right in mining, then you can do very, very well.

Nico Katzke: You mentioned that ETFs allow investors to take more direct thematic plays. You can take longer-term views on sectors or industries or geographies and allow more direct control of how and where your portfolio is diversified.

Because that’s ultimately the key, right? Building that diversification but then knowing what I’m investing in is doing what it says on the tin. That’s the key.

Now in South Africa, we’ve not yet seen the use of ETFs as theme proxies to the same extent as what we’ve seen in the US and Europe. We often look at the quarterly flow numbers from BlackRock that clearly show investors using ETF building blocks as a source of constructing portfolios that better match their client needs and investor preferences.

And all of this is happening at a very low-cost point, which is always a great plus. I’m cautiously optimistic that this is starting to change locally. I have many discussions with advisors where we are seeing a growing understanding of the benefit that these low-cost investment vehicles (that have clear mandates, clear thematic mandates or sectoral mandates) can actually offer investors.

So, what we say to clients is you can build incredibly well-diversified, low-cost portfolios using low-cost building blocks and then build in that direct diversification as opposed to relying on someone and hoping that they are well diversified. You can actually build that yourself.

We introduced two new ETFs, a Europe ETF and a Japan ETF, this year. Both are 25 and 35 basis points respectively. That is essentially for free, and it provides you access to a well-diversified offshore exposure.

And you combine this on the SatrixNOW platform with your preferred broker, the same way that you buy any other stock on the JSE. It’s an exciting time for investors truly in this space to actually build diversification.

The Finance Ghost: Now I think we should talk Satrix S&P 500 ETF i.e. the S&P 500, which is up year to date, as you said. It feels a little bit like the US markets are kind of downplaying what’s going on and not really giving it a huge amount of worry.

I guess the US market’s doing really well, but if you dig down, some of the big tech names have taken a pretty severe knock. So, if you’re looking at AI, for example, the stuff further up the value chain is doing well. The application layer – a lot of them have been smashed, aside from a name like Alphabet, for example.

So, you’ve got this backdrop of war, you’ve got higher energy prices, as you mentioned earlier, it affects the rollout of AI. You’ve got this kind of risk-off mentality in some sectors and not in others.

So, what is happening that the S&P 500 can be up year to date, and not by a small number either? I mean, when I looked the other day, it was up by like 7% or 8% year to date, which in the space of just over four months, which has included a war, that feels impressive, right?

Nico Katzke: It is impressive. Such an interesting time at the moment because it does feel like markets are having a bit of a bipolar relationship with it. It’s worth keeping in mind, though, that when we speak about the US equity market, specifically the S&P 500, we are working in large part with multinational corporations that have business operations around the world. So, it’s not a US-only story. I think it’s important to just stress that.

Now, following the recent quarterly earnings numbers, which I’m sure you kept an eye on as well, published in the US, earnings have seen a meteoric rise. This morning I looked up the EA page on Bloomberg (for those of you who have access) and there you’ll see that 7 out of the 11 main US sectors are showing double-digit earnings growth, with only healthcare in the negative.

Something like 80% of US companies have exceeded their first-quarter earnings expectations. S&P 500 company earnings growth is in the mid-20s currently for Q1. These are phenomenal numbers. I cannot recall a time where the US has seen such growth not on the back of a recessionary recovery. This is not a recovery; this is just earnings continuing to surprise on the upside.

Compare this mid-20s earnings growth to the longer-term average of about 7% – 7.5%, and it’s clear that although US businesses are priced quite rich, it’s very hard for me to look past the fact that they continue to deliver on earnings. Even industrials are up 11%, showing strong production drive in the US economy as well from an earnings perspective.

Now, for the longest time (and I don’t know about you) but for me it felt like pricing US equities was less about the fundamentals and far more about investment cycle themes like AI and innovation and stuff like that, and geopolitical themes. But now, based purely on fundamentals, it does seem like US equities are indeed looking strong.

I don’t want to sound like the biggest US bull out there, but I think we need to contextualise these numbers. April job numbers as well came out this week and surprised on the up in April. So overall, it makes me quite bullish on US broad economic growth prospects.

And it’s not only a Magnificent 7 thing, right? I still see opportunities more broadly in US equities as well. Which bodes well for investors with portfolios with broad US offshore exposure, because you would know the MSCI World, that’s 70% US. So those of you who have offshore equity exposure, this is good news.

But there is a bit of a catch here, and this may prove to unravel, I suppose, the good news story that I’ve been saying right now.

Let’s put the flip side to this, Ghost. I’m less bullish on the US dollar, and this is for several reasons.

Primarily, I would say from a debt perspective. Simply put, the $38 trillion US Treasury debt is not sustainable. Especially with a gap between spending and earnings growing wider each month. 

Now, if you look at new Treasury issuances, a large part of that is actually going into paying off previous debt, which is never a good sign, right? If you’re going to the bank to get a loan to pay off old loans, that’s never a good sign.

Simultaneously to this, the Trump administration seems hell-bent on having a weaker dollar, specifically to incentivise local production, stimulate exports, et cetera. So, a weaker dollar is very much part of their narrative.

Now think of this: this makes the prospect of lending to the US government and earning back weaker dollars in future, far less attractive. Which makes US bonds and US Treasuries less attractive from a global investment perspective. 

And what this is going to do, if there’s less demand (of course, knowing how bonds work) this is going to put upward pressure on interest rates in the US.

Now this, in turn, means possibly – and it’s a long-winded answer, but just follow my reasoning here – this would possibly put pressure on interest rates to be higher in future in the US and then further pressure the US fiscus (so US Treasury); as well as highly indebted US companies. Which are, generally speaking, more leveraged than most other regions. 

And this may actually in turn start to cause economic pain. So, for all the good earnings numbers I’ve spoken about now, the fact that the US is on the back foot in terms of attractiveness of the dollar will start to come back to bite at some stage, unless that reverses.

So that’s where we now start to get that ugly word called ‘Stagflation’, i.e. having high inflation and slower growth. This can stem from Trump’s undoubtedly inflationary policies and the slowdown of US growth. Which may actually be far more painful and harder to get out of than most people appreciate. This is, for me, my biggest concern at the moment.

So, for now it seems a way off, but the reality is, if the Iranian conflict does not find a simple off-ramp, and oil price disruption becomes reality, we may actually see the ‘stagflationary’ scenario as more likely. I would hate for that to be the case because we know that once you enter a period of ‘stagflation’, it’s very hard to get out.

So, in summary, I’m quite bullish on US equities still, but the broader US story is looking far shakier than might be the case in other periods.

The Finance Ghost: Let’s bring it home then and revisit a discussion that we’ve had before, which is the topic of bubbles.

So, if we look at all of this, there’s the risk of rates being higher for longer, you’ve got inflation, you’ve got energy prices up, you’ve got massive AI spend by the hyperscalers, which to a very large extent is being funded by things like advertising revenue, consumer spending.

If you think about Amazon, if you think about Alphabet, if you think about Meta: there’s an enormous amount of investment going into the AI value chain. That is, at the end of the day, being paid for by literally consumers buying stuff on the internet. And then those are the consumers who could find their work life made very difficult by AI.

So, it feels like we’re in this really weird, exciting, and terrifying time in the world. I’m certainly using Copilot quite a lot now to just help me think, to critique stuff that I’ve written. I think it’s very dangerous when you use it to think for you. Your prompt is, “Oh, I need an article, please write one”, then you are literally rotting your own brain.

But if you’re using it to actually be a thinking partner, to just give you some good insights and feedback instantly, then it’s actually very powerful. And I know lots of people are using Claude extensively in their financial models, etc.

I’d love to hear the extent to which you are playing around with this stuff?

But what we’ve talked about from an economic perspective, does any of that change your previous viewpoint, which is that using the word ‘bubble’ is not actually a particularly helpful discussion point, really? 

It only really becomes clear in hindsight, obviously. But then where does that leave people in terms of being able to actually invest in this theme, at the kind of valuations that we’re seeing now?

Nico Katzke: Oh, it’s a great question. You know what, I’ll give you a personal confession. I’ve now for the past few years (and you will know this) publicly made the case for why using terms like ‘bubbles’ is not useful.

And let me again make this as passionately as I can, right? I actually think that ‘bubbles’ and ‘busts’ get a bad rap, and a worse rap than is needed. Thinking about this, the issue of potential AI bubbles, linking it to tulips and everything, thinking about it a bit more, it does seem like the optimal amount of, call it, bubble and bust cycles are not zero.

In other words, it’s almost like we need bubbles and busts to occur. If you look at truly societal game-changing technologies like the railway, internet, aerial travel etc. it’s clear we actually need periods where people almost lose their short-term sensibilities, to allow them to build out long-term infrastructure that moves societies forward.

Building the railway in the US, this required massive investments. Early pioneers, a lot of times, do not make money – and lose everything. But the technologies remain, and that is what propels us forward.

So, labelling something as a ‘bubble’: not helpful. And I’ve been saying this for years now.

When it comes to AI, I think it is clear that we cannot put the poop back into the donkey. We’ve seen the power that this has, and its full disruption, I think, will only become clearer in time.

But the companies at the forefront of AI development and building out the infrastructure, are clearly still generating profits, and we are seeing AI usage growing. Like you mentioned, you’re using it more and more.

It also seems like the market may be very right in that AI should not be priced to deliver in the next quarter, or even two or three, but see it more as building out a framework. Future work of having AI tools firmly integrated in everything we do. It’s going to be less of a dramatic shift and more of a smooth transition to co-working.

There was a time where everyone and his dog was basically viewing AI as sort of an existential threat to mankind, and saying it’s going to replace your job and it’s going to take your wife and kids, and it’s going to completely disrupt everything we do. What we’re seeing is just a more smooth transition to co-working.

I think it’s going to be almost automatic. If we look back in 20 years’ time, we might actually look back and say, “Why were we scared about this technology?”. It’s so smoothly integrated in everything we do that I think it’s going to become irreplaceable.

So, for me, how we are using it, for example, or how you are using it, I think is probably going to be irrelevant in how we use it in five years, ten years’ time. The reality for me remains that this technology continues to grow and will continue growing.

Money is flowing into the sector, no doubt, and the companies at the forefront are making money hand over fist. These are not companies building this framework based purely on debt. These are cash-flush companies that are simply directing their attention to the development of a technology that, in all likelihood, will remain.

And once it starts being more broadly integrated in everything we do, the investment case will be even more clear. I still like the AI theme. I do think that there’s going to be a lot of pain along the way. Like I mentioned, early pioneers: a lot of them miss the bus completely.

But driving this technology forward, I think, is a good thing. 

Don’t think of “boom and bust” cycles as a harbinger for us not needing to develop. We actually need booms and busts because in that irrationality, that frenzy for taking part, that’s where we see massive technological innovation. I’m quite excited about this.

The Finance Ghost: Yeah, I think that’s a great place for us to leave it. I’ve got to say, that analogy about the donkey will stay with me for the rest of my life. I know the toothpaste one; I haven’t heard the donkey one. I’m glad you shared that with me. Between that and the “Strait of Hummus”, I’m going to have to concentrate really hard to not mix up some metaphors here. 

But Nico, thank you so much. It’s been a great conversation, a lot of really cool insights.

We’re in a fascinating time in the world. There’s a lot for investors to think about, and I would encourage investors to take heart from what you were saying earlier about using ETFs as building blocks to build up your equity exposure.

It is a complex market and you’re going to want to think about these different blocks. And of course, Satrix ETFs are one of the obvious ways to actually achieve that exposure.

So, Nico, thanks so much, and I can’t wait to do another one of these with you, as always, which will probably be in a few months’ time, I’m sure. In the meantime, good luck in the markets, and I know you’re very busy out there. All the best with your upcoming conference travels and the rest as well.

Nico Katzke: Thanks, Ghost, and as always, great to share this platform with you. Can’t wait for our next discussion.

The Finance Ghost: Ciao.  

Disclaimer:

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