Reza Hendrickse, Portfolio Manager at PPS Investments

The first quarter of 2026 started constructively however that optimism did not survive the quarter intact. In late February the US and Israel launched strikes on Iran resulting in retaliatory attacks across the Gulf, the near-total closure of the Strait of Hormuz (a chokepoint through which roughly 20% of global oil supply normally flows) and an oil price shock, described by IEA as the largest supply disruption in the history of the global oil market.

Importantly, the shift in sentiment did not coincide with an immediate collapse in economic fundamentals. Growth remained positive through the quarter and inflation outside of energy had been moderating. While the situation remains fluid, the range of possible outcomes has widened considerably, and the risks that policymakers and investors now face have increased compared to the start of the year.

Global Economy

The global economy had entered 2026 in reasonable health. The IMF's January update projected growth of 3.3% for the year, supported by healthy labour markets and ongoing investment. That baseline now looks optimistic.

The April 2026 World Economic Outlook pointed to a more sombre picture, with downside risks from higher energy prices, persistent geopolitical uncertainty and supply chain disruption becoming harder to dismiss. Some market participants have raised their probability of a US downturn over the next 12 months, driven by the surge in oil prices and expect unemployment to rise as hiring slows. The European Central Bank has warned that a prolonged conflict has the potential to push major energy-dependent economies such as Germany into technical recession by year-end.

Stagflation (the uncomfortable combination of weak growth and persistent inflation) is a concern on some investors’ minds. Our base case remains that this is a supply shock that interrupts rather than permanently derails the global economy, but that distinction offers limited comfort when households are facing sharply higher energy and food costs and when central banks have lost the room to respond with meaningful rate cuts. Central banks in South Africa and several other emerging markets have suspended anticipated rate reductions, citing imported inflation risks from the energy shock.

The US Federal Reserve left rates unchanged in March, noting solid economic activity but elevated inflation and acknowledged openly that the outlook had become difficult to read. The key takeaway was markets should not count on near-term cuts.

South African economy

South Africa had been on an encouraging trajectory coming into the quarter. Inflation had slowed to 3.0% in February, aligning with the SARB's target. Real GDP had expanded for a fifth consecutive quarter. The February Budget struck a constructive tone, with the fiscal deficit projected to narrow, gross debt expected to stabilise at 78.9% of GDP and the primary surplus continuing to improve.

That positive domestic story has been complicated by the external shock. Fuel costs are now driving inflation higher, making the interest rate cuts that had been expected in mid-2026 unlikely. Analysts suggest fuel prices may remain elevated if supply tensions persist and the rand does not recover.

South Africa's structural story remains more credible than it has been for some time, but the global backdrop has made the near-term path more difficult.

The energy shock could prove more persistent while supply chains and monetary policy will take time to work through.