As South Africa’s all share index reaches the historic 100,000 points mark this week, local markets have appeared complacent amid a lack of clarity around Trump’s latest tariff threats against South Africa. At the same time, a number of domestic developments are unfolding that are forcing investors to weigh up the structural challenges and potential tailwinds that are adding to the dynamics that could drive the outlook for SA markets.

This is according to Old Mutual Investment Group’s (OMIG) latest quarterly investment update this week, which highlighted the implications for local investors of a lower inflation target, political fragmentation under the Government of National Unity (GNU), and a welcome – but temporary – revenue boost from the global commodities cycle.

Opening the presentation, OMIG Portfolio Manager Jason Swartz emphasised that one of the most pressing economic and market developments currently is the South African Reserve Bank’s (SARB) suggestion that it may lower the inflation target band, currently set at 3% to 6%. While such a move could anchor inflation expectations more firmly and strengthen monetary credibility, it also risks tightening financial conditions in an already sluggish economy.

“With the economy underperforming and growth still tepid, the timing of such a shift matters,” said Swartz. “Long term, we believe that lowering the target is a sensible idea as SA needs to align with other emerging markets, but over the short term we’ll need to see historically higher administered price inflation resetting lower for the SARB’s more optimistic view to play out,” he warns.

“Short-term pain will certainly be felt in this scenario, but the longer-term benefits are likely to outweigh the risks as a lower cost of capital should reduce borrowing costs and lift domestic growth,” he explains. “While the impact of lower inflation on debt serving costs are likely to be meaningful, nominal GDP will naturally also fall; and therefore, the primary surplus we would need to stablise debt to GDP will only improve should the knock-on impact to real GDP be positive.”

OMIG Head of Equities Research Meryl Pick pointed out that there is still a bright spot for the local fiscus over the shorter term. This lies in the likelihood of precious metal strength boosting mining tax revenue, providing a windfall for the Government of National Unity.

OMIG is currently fairly bullish on PGMs, based on research that shows that, outside of China, electric vehicles (EV) are not growing as fast as previously projected. “The EV transition is proving to be costly for car manufacturers, without government funding, which is slowing in the EU and US, and manufacturers are launching new internal combustion engine models alongside EVs and hybrids,” Pick explained.

“While this is strengthening the case for PGMs demand, the local industry has been reluctant to invest in new PGM supply due to uncertainty about long-term demand. We therefore anticipate a supply cliff on the horizon, which further supports the case for a PGM price rally,” said Pick.

Firmer prices for PGMs, in addition to the rise already seen in gold prices, supports OMIG’s conviction that SA is likely to see a commodity-driven revenue windfall.

However, she warns that while this will help to narrow the fiscal deficit and provide a short-term cushion for government finances, it is not a structural fix.

“There’s no question that commodity revenues are boosting the fiscus this year, but the gains aren’t evenly distributed across sectors,” she says. “We’ve seen precious metals do the heavy lifting, while domestic-facing sectors – particularly discretionary retail – have seen earnings pressure and share price declines.”

Pick and Swartz believe that this commodities windfall has handed the GNU a gift, but it remains to be seen whether it can capitalise on it.

“The GNU is currently tenuously holding together, but it has a short window of opportunity to drive growth and the jobs agenda,” says Swartz. Small wins, such as those seen in ministries such as finance, infrastructure and home affairs are not enough to drive the sustainable growth needed by the country, as a preoccupation with political positioning continues to overshadow reform progress.

“There’s increasing concern that the GNU will struggle to make meaningful progress on reform. We are already seeing slippage on structural initiatives, and political distractions are preventing cohesive action on key priorities like logistics, energy and crime,” he added.

Despite the government’s rhetoric on reform, execution remains slow. Energy, transport and governance bottlenecks continue to weigh on business sentiment, and a lack of clarity on policy direction is creating friction for capital allocation.

“What we’re seeing now is a market that’s rewarding resilience and cash generation,” said Pick. “But without meaningful reform acceleration, it’s difficult to make a strong case for broad-based earnings growth.”

As de-listings continue and investor interest in local equities wanes, the emphasis is increasingly on “survival of the fittest.” Opportunities in local equities do exist, it’s just about identifying where the right opportunities are, she adds. “Companies with solid balance sheets, execution track records and pricing power will continue to outperform – but in a market where sentiment remains fragile, the market is trading at a discount.

“If we look at the SARB’s inflation targeting plans and the long-term effect of structurally lowering the bond yield that this could achieve, we could have a mechanical flow through to valuations. Lower bond yield means a lower cost of capital going into discount rates, and therefore a higher Price/Earnings (PE) rating that's warranted for the share,” she explained.

But the political uncertainty is feeding through into stock valuations. Despite pockets of strong performance - particularly in commodity-linked equities - SA Inc shares remain broadly depressed, with little differentiation between high- and low-quality assets. “SA Inc stocks are trading at roughly the discount level last seen during Covid times and during the Global Financial Crisis. So, the negativity is certainly in the price, and any beat on expectations or a structurally lower bond yield could unlock value; but at this point, it has to come alongside convincing growth,” says Pick.

“There’s value in the market - but investors need confidence that policy is moving in the right direction. Until then, we’ll continue to see discounts persist, and capital remain hesitant,” she concluded.