Higher-for-Longer: Navigating Inflation, Interest Rate Uncertainty
“Government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil.” (Warren Buffett, 1979 shareholder letter)
While we entered the year expecting orderly rate cuts, easing geopolitical pressure, and a growing world economy, we now face the worst-case inflation risk: NACHO – Not a Chance Hormuz Opens. At the time of writing, May had seen a series of failed diplomatic attempts to secure an end to the war between the US and Iran, with the priority being opening the Strait of Hormuz and thus allowing 20% of the world’s oil to flow freely again.
Against this backdrop, global markets spent most of the month in a tug-of-war between better-than-expected US corporate earnings on the one hand and concerns about the war’s impact on the macro economy on the other. When the dust settled they had ended the month higher, though some analysts are seeing the equity market’s rally as increasingly fragile and underpinned by shaky fundamentals.
NACHO and the inflation comeback nobody wanted
In May, Brent crude briefly traded above $110 per barrel as the Strait of Hormuz remained closed and US-Iran negotiations stalled. There’s even been talk of NACHO (Not a Chance Hormuz Opens), a worst-case tail risk facing markets.
This has meant the Federal Reserve, which opened 2026 with two rate cuts priced in by futures markets, is not expected to cut again this year, and Europe is moving in the same direction. The phrase that dominated May’s investor communications across every major global investment house was the same: “higher for longer”.
South Africa: Caught in the crossfire
As a net fuel importer, South Africa’s April CPI surprised sharply to the upside, increasing to 4.0% year-on-year versus 3.1% in March – the highest reading since August 2024. The jump was driven almost entirely by fuel prices, but second-round effects are already visible in transport costs and food inflation.
The South African Reserve Bank has held the repo rate at 6.75% for two consecutive meetings, before raising it 25 basis points at the latest MPC meeting. For South African investors, this means the tailwind of a rate-cutting cycle may be reversing.
Navigating the higher-for-longer reality
So, what should South African investors be doing to position themselves for this shift in the global macroeconomic landscape? Here’s a checklist of what to consider when higher inflation and interest rates are on the horizon:
- Fixed income inflation-proofing. Long-dated bonds are more sensitive to interest rate moves, while shorter-duration instruments, floating-rate bonds, and inflation-linked securities offer better protection in a rising-rate environment.
- Inflation-resistant stocks. Energy stocks, gold miners, materials companies, and other businesses with pricing power have historically outperformed during periods of persistent inflation. South African gold miners, in particular, are positioned to benefit from higher bullion prices.
- Prioritise quality in equities. Companies with strong balance sheets, durable cash flows and consistent earnings are better placed than speculative growth shares.
- Diversify. A weaker rand and rising domestic rates make the case for geographic diversification even more compelling.
- Maintain liquidity. Holding a higher cash or money-market allocation preserves flexibility.
While the investment landscape is rife with uncertainty, the fundamental investment case for South Africa has not collapsed, and a resolution of tensions in the Middle East would remove a significant headwind to growth and inflation. However, higher inflation is unlikely to be a passing phase.
*All facts and figures accurate at time of writing.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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