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SIMON BROWN: I’m chatting with Izak Odendaal. He’s Old Mutual Wealth’s chief investment strategist. Izak, I always appreciate the time. Let’s kick off with the inflation picture as we wind down 2025. I think it’s looking fairly good. We’ve got a new inflation target. We have a little leeway on either side of that 3% number, but we are sitting at nice, low inflation, and hopefully that holds going forward.
IZAK ODENDAAL: It has been a good year on the inflation front, and I think the outlook is pretty good as well. We’ve seen the rand strengthen quite a bit during the course of this year. The oil price is low. But I think importantly in the sectors that are not linked directly to the exchange rate or to energy prices you also see pretty low inflation.
I think ultimately what the Reserve Bank wants to see is all South Africans kind of getting used to the idea of 3% inflation…
Because that ultimately also changes our behaviour and how we think about prices, how businesses adjust prices, how we approach wage negotiations, and so on. That is ultimately how you get down to 3% on a more sustainable basis.
In the short term, if you look at inflation, it’ll probably creep up over the next couple of months. But then it also reaches a base and starts declining again. So it’s a pretty muted outlook and that is why the Reserve Bank was able to cut interest rates at its November meeting.
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SIMON BROWN: Expectations are so very, very important. I saw a headline a week or two ago about a union being insulted by a, I think a 5.3% offer. This is the perhaps the tough part of lower inflation, as you say – getting it into labour, into the consumer and our behaviour around it.
IZAK ODENDAAL: Yes. To be fair, I think a couple of years ago that initial offer to the union would have been seven, eight or 10%. So we’ve already managed those kind of anchor points around which we negotiate these things to come down a lot, and they will continue to decline over time because it will take time for us to get used to the idea of lower inflation. We’ve always had pretty high inflation, which is why we did not experience that huge shock in 2022/23 because for us it was the fact that the petrol price went up a lot.
That was pretty normal, whereas in Europe and America, going from very steady inflation over many decades, suddenly you’ve got seven, eight, 9% inflation.
For them it was a huge psychological shock and obviously had massive political ramifications across the board.
SIMON BROWN: To your point, it was at 40-year highs. For us it was Tuesday, in a sense. The risk perhaps is those administrative prices which are sort of beyond control. Fuel is random and oil administrative. Eskom’s going to come with their increases, regardless.
IZAK ODENDAAL: Yes. The fuel price will always be volatile. Nobody controls that. Similarly, food prices depend on the weather. You can have good years and bad years.
Administered prices are the bigger problem. It’s ironic, because obviously the government has the inflation target, but the public sector has been the biggest culprit in not adhering to that inflation target.
But it also becomes more difficult to justify an 8% increase when you know the inflation target is 3%.
So even there I think it starts filtering into the idea that these kind of price increases that companies want around 3% – they’re never going to be 3% perfectly, but need to be at least in the same ballpark.
And in the case of Eskom specifically, hopefully within the next year or so we’ll be over the worst in terms of the big increases from their side, because they’re still trying to recoup costs from building Kusile and Medupi – and it’s been a complete disaster. But once that’s kind of …, their prices should increase much more slowly.
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SIMON BROWN: Look, we’ve had 1.5% in interest-rate cuts in prime from 11.75%, which was terrifying. We are down at 10.25%. Can we anticipate perhaps a few more cuts next year from our MPC?
IZAK ODENDAAL: Yes, I think so. Again, it all depends on the international environment and what happens with the Fed and the dollar and all that stuff. But yes, I think in the Reserve Bank’s own inflation forecast and inflation outlook there’s definitely room for more rate cuts.
I think they’ll proceed quite gradually because it is still a very uncertain environment, especially internationally. But there is room.
By the end of next year, we could definitely see another two, maybe three, 25 basis-point cuts from the Sarb if everything goes according to plan.
SIMON BROWN: And if we take it more broadly and look at the economy, we’ve had Moody’s keep us unchanged, we’ve had an upgrade from S&P, we are off the grey list. There are a lot of very small green shoots that are starting to come through. And of course, the international situation can change on a dime. But for our local economy, I get a sense that the forward look may be better than it has been in a long time.
IZAK ODENDAAL: Absolutely. We’ve come off a very, very depressed period. There has always been a lost decade for our economy in terms of just crawling along at sub-1% growth. Now we have kind of broken through that 1% barrier if you look at the latest GDP numbers.
But also, if you look at kind of the consensus forecast for next year, it should be above 1%. Now, 1.5% is not anything to get excited about in the international context, but again you have to look at where we come from as a country – this period of very low growth which was caused by huge political uncertainty, caused by persistent load shedding, by other infrastructure bottlenecks, caused by a fairly difficult international climate, by Covid, all those kind of things.
So, I think if you look ahead, we’ve sorted, it seems, load shedding. We are in the process of fixing logistics. You are starting to see private companies talk about their plans for operating train sets. And obviously the political climate seems to be fairly stable.
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We’ve seen interest rates come down. Those have obviously been very, very high over most of the last decade.
And then, to your point, you are also starting to see ratings upgrades and international or financial markets being a lot more comfortable with the state of government finances. For a long time, there was real concern around unsustainable debt levels and the market punishing you by raising the borrowing cost of the government, which in turn makes their debt level unsustainable. So you’re kind of stuck in a vicious cycle.
But we are now breaking out of that cycle. You’ve seen the bond yields come down, or the borrowing costs of the government come down quite sharply this year, and now you are in virtuous cycle territory there.
As that comes down, obviously it relieves pressure on government’s finances. That in turn makes the market more optimistic. The ratings agencies are more optimistic.
So I think we’re kind of climbing our way out of this hole that we’ve been in for at least the last decade.
SIMON BROWN: Are our risks then for 2026 as a country perhaps more external? The easy one to put a pin into is the AI stocks. Or are there some real internal risks we should worry about?
IZAK ODENDAAL: Yes, I think specifically about the kind of market in South Africa. I think the risks are, I would say, for once mostly international, although on our domestic front obviously we’ve had this massive rally in precious metal prices, and if you get a pullback there it will clearly hurt the mining stocks.
But I think if you look beyond that, on the JSE it’s not as if anything looks particularly too expensive or stretched. Yes, internationally I don’t think you can say the same. I think internationally there has been a lot of excitement around artificial intelligence, and if you’re seeing signs that perhaps some of that optimism is misplaced, you could see a pullback in international markets.
I think the big thing internationally is really going to be just the state of the US economy and how the Fed reads that.
If you’re starting off next year and the Fed says, ‘We are not cutting rates because we are worried about inflation, or because we’re not seeing any deterioration in the economy,’ – that’s one set of outcomes. On the other hand, they could look at the situation and say, ‘We need to cut rates because there is a weakening in the labour market’. Then obviously that filters potentially into a weaker dollar and perhaps more upside for the gold price.
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So in that sense, we’re kind of all waiting for them to make up their minds about how to beat the economy. And of course, all of that happens against the backdrop of Jerome Powell, the Federal Reserve chair, being replaced around May when his term expires. Then who does Trump put into the hot seat, and how does that individual take things forward?
We know that Trump really, really wants aggressively lower interest rates in the US.
SIMON BROWN: I take your point. And if he does get that, that is a big one to watch.
We’ll leave it there. Izak Odendaal, wealth investment strategist at Old Mutual, I always appreciate the insights.
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