London Trip Notes: The Market Thinks We‘re Early

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London Trip Notes: The Market Thinks We‘re Early

IdeaM

London Trip Notes: The Market Thinks We're Early

Our macro discussions with London based investors last week were noticeably more

challenging than our last trip. Earlier this year, conversations centred on improving

inflation, fiscal consolidation and the prospect of lower interest rates. This time, firmer

inflation, weaker growth and additional SARB tightening dominated many a meeting.

Nevertheless, the recent decline in oil prices has improved the medium-term outlook and

investors increasingly recognise that the worst of the inflation shock may now be behind

us (we expect CPI to have peaked at 4.8%Y in June). Still, we sensed clear reservation

about the glide path toward more favourable conditions.

Our inflation outlook generated the greatest debate. We argue that inflation is undergoing

a structural moderation (secular decline in unit labour costs, a global disinflation factor

and a lower inflation target), and should return towards 3%Y during 2027 as the oil shock

unwinds, food inflation remains contained and spare capacity persists. This is not a

consensus view. Many clients were sceptical that inflation could fall materially below

4%Y, arguing that the SARB would be unwilling to ease policy while this transpires,

particularly if the Federal Reserve begins tightening. Food inflation and El Niño risks also

featured prominently, with many unaware of South Africa's strong grain harvest and the

resulting inventory buffer.

Structural growth remains the principal constraint to greater participation from offshore

investors, particularly in equities. Questions consistently focused on fixed investment, the

pace of logistics reform, service delivery, municipal finances and whether South Africa can