Inflation Clouds are Gathering

Rising energy and food costs are reshaping the investment outlook, creating fresh risks and opportunities for South African investors.

At this point, the Reserve Bank governor could be forgiven for thinking, ‘Woe is me!’ No sooner had the 3% inflation target been announced in November 2025 than conflict broke out in the Middle East.

The economy had begun the year with a favourable inflation outlook, supporting a lower interest rate trajectory. This mirrored the global environment, where inflation fears had largely receded following the pandemic upheavals.

The shock of the Middle East conflict has rapidly shifted the inflation outlook across the globe, with elevated oil prices and disruptions to refining capacity placing renewed upward pressure on inflation. Central banks have had to react, while investors face the difficult task of deciphering what these developments mean for global economies and financial markets.

Several key investment themes have emerged from the current inflation environment.

Second-Round Effects

The wider economic impact of the energy shock was always likely to be severe. Significant parts of the economy rely on fuel as an essential input into the goods and services they provide. Logistics companies, farmers and manufacturers are just some of the economic participants immediately impacted by higher fuel costs. Retailers also face the prospect of lower sales as consumers have less spending power.

Companies with strong competitive advantages in their sectors are better positioned to raise prices to offset higher fuel costs and protect their profitability. They may also gain market share as weaker competitors are forced to increase prices more sharply, potentially losing customers in the process. Such entities present attractive investment opportunities in the current environment.

Food and Climate Risks

Rising fertiliser prices, driven by higher oil prices, and the looming impact of El Niño weather patterns are combining to put upward pressure on food prices. Uncertainty over how long these factors will persist makes it difficult to assess the full extent of their impact.

Higher food prices will place enormous pressure on discretionary retail sectors, such as clothing and entertainment, as households are forced to allocate a greater share of their spending to food.

Administered Prices

These developments come against a backdrop of steadily rising administered prices in South Africa. Electricity, water and municipal rates have all seen significant tariff increases over the last few years.

The acceleration of structural reforms in the country has started to create attractive investment opportunities, particularly in sectors where businesses can reduce their exposure to rising administered costs. Energy and logistics reforms are opening up new investment opportunities, whose appeal is further enhanced by the developing inflationary environment.

The 3% Inflation Target

The 3% inflation target means the reserve bank is likely to raise interest rates in an effort to quell inflationary pressures. Consequently, local interest rates are expected to rise and remain elevated in the short term.

This presents attractive fixed-income investment opportunities, with local instruments offering the potential for respectable above-inflation yields without taking on the higher levels of risk often associated with such returns. Fixed-income investments may also provide some protection against volatile equity markets, as shares are likely to face greater pressure in a higher-inflation environment.

Navigating the Uncertainty

We are heading into a period of difficulty and uncertainty, shaped by factors largely out of our control. Adding to the challenge is the limited visibility on when these pressures might ease.

As investment professionals, ours is not to sound the call of impending woe. Our responsibility is to assess the situation carefully and identify the most attractive investment opportunities while keeping risk to our clients to a minimum.

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