Advising clients as SARB inflation target evolves
Data shared by the International Monetary Fund (IMF) suggests that South Africa is moving into the sweet spot of global inflation rankings. At 3.4% we came in below the world average of 4.2% and just outside the 2-3% range being indicated by the IMF as ‘normal’ inflation for 2025.
Emulating developed markets
The country’s inflation ranking scooped a brief mention at the recent PSG Asset Management 2026 Outlook presentation, as updated 2025 inflation numbers pushed South Africa closer to some of the world’s economic powerhouses. Justin Floor, Head of Equities at the firm, noted that the country’s CPI was “not that much higher than developed markets” and “only a percent or so higher than the US.” He used this macro indicator to paint a rosy picture of emerging over developed market equities over the coming years.
Inflation has been in the news following the South African Reserve Bank (SARB) decision to shift from its 3-6% inflation target range to a more specific 3% target. Over the 25 years since its introduction, the inflation targeting approach has bolstered the central bank’s credibility and reduced inflation volatility. Eugene Botha, Head: Research Hive at Momentum Investments, penned a thought leadership piece to explain the rationale for the new approach to inflation targeting, and what this means for asset class prospects.
He explained that the midpoint of the 3-6% target range was high compared to global norms. “Moving South Africa’s target to 3% aligns it with major trading partners, reducing inflation risk and reshaping the investment landscape,” he wrote. “Lower inflation reduces uncertainty, allowing for longer investment horizons and more effective capital allocation, while narrowing exchange rate volatility.” Lower inflation supports the rand, but there are other explainers for the rand’s performance against the US dollar through 2025.
Early signs of dollar weakness
According to Floor, we are 18 months to two years into a weakening US dollar cycle. He noted that after 15 years of strengthening against a trade weighted currency index, the world’s major currency started showing signs of cooling off just after the COVID-19 crisis, worsening from mid-2023. “The US dollar goes through periods of underperformance, and then outperformance … and these multi-year periods tend to be quite pronounced,” he said. A weak dollar creates a tailwind for commodities, emerging market currencies and emerging market equities.
It should not be lost on FAnews readers that a stronger rand, which improved by around 13% to the US dollar over 2025, feeds through positively on domestic inflation, opening the way for the SARB’s Monetary Policy Committee (MPC) to announce further interest rate cuts through 2026. And that, in turn, will boost the fiscus. “SARB simulations suggest South Africa’s economic growth could rise by 0.25% within five years and 0.4% after a decade, driven by higher investment and fiscal savings from reduced debt-service costs,” Botha explained.
He reminded readers that inflation affects discount rates, borrowing costs and the valuation multiples used by asset managers in all manner of calculations. “Lower inflation may potentially compress country risk premia, reduce nominal yields and alter the relative attractiveness of bonds, cash, equities and real assets … understanding these dynamics is critical for both tactical positioning during the transition and strategic allocation in the new regime,” he added. It turns out South Africa’s inflation has been more benign than your writer anticipated.
The administered price dilemma
Momentum Investments noted that local inflation has averaged 5.3% since 2000, with inflation volatility falling sharply after 2010. It also commended the SARB for its 78% success rate in keeping inflation within its bands measured over five-year periods. The only negative is that inflation has trended nearer the upper band, most recently 6%, due to structural rigidities such as administered prices (think electricity and fuel) and fiscal deficits. As an aside, most consumers experience a personal or household inflation far above the published CPI.
Botha noted profound changes in asset class performance linked to a more stable inflation outlook. “Local equities delivered strong long-term returns, but with sharp drawdowns during crises, while bonds, once plagued by negative real returns in the early years, became a reliable source of income as inflation stabilised,” he wrote. “Cash, however, rarely outpaced inflation, offering persistently low real returns, while listed property moved between deep losses and spectacular gains, reflecting its sensitivity to macro shocks.”
The key observation here is that all else being equal, periods of higher inflation compressed real returns across asset classes, whereas periods of moderate inflation, such as that experienced between 2010 and 2019, saw robust returns from bonds and equities. The impact of moderate inflation reflects in the domestic asset class returns generated from local equities over the past 12 months, and South African investors can in part thank 3.5% inflation for the 38.5% jump in the JSE All Share Index and near 24% total return across domestic bonds in 2025.
Resetting the sights
The SARB signalled its intention to change the inflation target midway through 2025, but the move to a 3% central point (with a 1% swing either way) was only formally announced and ratified by the Minister of Finance on 12 November 2025. Botha said inflation would not move to the 3% target overnight, warning that the MPC may even have to tighten its approach over the short term. Asset classes will hit their stride as inflation stabilises at the new mark. “Over time, lower inflation may lead to adjusted return expectations across different asset classes,” he said.
This conclusion is important for asset managers, financial advisers and investors, and all stakeholders will have to consider how different asset classes may respond as inflation nears 3%. Momentum Investments expects income-generating assets will become more attractive as their inflation-adjusted returns improve; that growth-oriented investments could experience valuation shifts, though their long-term potential hinges on economic and business fundamentals; and that low-yielding instruments will likely face challenges.
Floor did not address asset class prospects in an inflation context, but remained upbeat about emerging market equities, including South Africa. He took a pragmatic view of the rand returns generated by domestic bonds and stocks last year, saying the outlandish 2025 performances were something investment nerds would tell their grandkids about a decade or two hence.
PSG Asset Management expressed concern over the level of US exposure in local investors’ offshore buckets, commenting on the outsized concentration risk in major US indices. They also conceded that it was difficult to predict gold and PGM prices following big moves over 2024-2025. Gold was said to be as likely to spike higher from its current record highs as it was to move back down to the USD2000 per ounce level.
Assessing negative returns
Momentum Investments crunched some numbers to illustrate a slightly higher chance of one-year negative returns under a sub-3% inflation scenario. They said the probabilities of negative returns rise across thresholds: for example, the chance of a one-year return from equities of below 0% increases from 30% to 33%, and for a fall of 10% or higher from 12.5% to 15.9%. “This reflects that a lower inflation assumption amplifies relative downside risk, even though nominal market volatility remains unchanged,” Botha said.
Asset managers and their financial advice partners can manage these risks by diversification across asset classes and geographies; continuous monitoring of drawdown limits; stress testing for severe market shocks and low-return environments; dynamic asset allocation to keep risk within agreed tolerances; and liquidity buffers to ensure resilience under stress. “Investors should prepare for a world where inflation risk is lower, interest rates are structurally lower and real returns are more predictable,” Botha concluded.
Beware stretched valuations
At the 2026 Outlook Presentation, Floor warned of emerging risks in areas like market concentration, stretched valuations and unpredictable geopolitics, to name a few. The tools available to navigate this mess include diversification and being sceptical of consensus views. His parting advice will resonate with advisers and investors alike: “Have a plan, stick to it.”
Writer’s thoughts:
South Africa’s move to a lower inflation target could reshape asset class returns and portfolio construction. Are you actively repositioning client portfolios, or do you rely on fund managers to make the necessary allocation calls? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
