Old Mutual predicts CPI will fall to 4.5% by mid-2024

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The Old Mutual Investment Group says it expects the Consumer Price Inflation (CPI) to fall to 4.5%, the midpoint of the Reserve Bank’s inflation target by mid-2024.

The investment group is also positive about lower levels of load shedding next year, given the massive capital investment made by the private sector in renewable energy. But headwinds remain.

If inflation declines to the mid-point of the Reserve Bank’s target band, Old Mutual Investment Group says this will likely create room for the Bank to start cutting rates.

Such a move would be seen as supportive of the local economy, as all debt holders would pay less in debt repayment costs.

But a big question mark hangs around what the political landscape will look like, given the looming national and provincial elections set to take place next year.

Old Mutual Investment Group Portfolio Manager, Jason Swartz says, “We’ve thought about a couple of scenarios. Our base case is that ANC will likely partner with a small party to get over 50% and there in terms of economic policy, we’ll probably see more of a status quo; still a commitment to reform but probably still slow… If they do form a government with the EFF, the policy could be very divergent and you could have either a very populist or very aggressive reform agenda, which will impact the political economy quite significantly.”

On this score, Finance Minister Enoch Godongwana, says he hopes that South Africans will vote for stability – namely the ANC – arguing that a coalition government at the national level would be problematic for economic policy formulation and even implementation.

“It’s going to be a problem. Because partly it’s informed by your policy choices as a government. Now if you’ve got a conglomeration of people who are going to sit around to discuss different policy statements, it’s going to undermine the efficacy of the budget process.

Local stocks haven’t fared so well this year, with the exception of some uplift in stocks in the fourth quarter. But Old Mutual Investment thinks that given current low valuations, there’s scope to invest in areas like banks and clothing retail.

But at a broader level, the investment group says it’s currently underweight in South African equities, preferring the safer bet of South African bonds for now.

Head of Global at the Old Mutual Investment Group, Urvesh Desai says, “The reason there is because we’re much more comfortable that inflation will fall. But we’re unsure that growth will pick up and where we are in the South African market is that – Yes – we’ve got really cheap valuations and there is potential for good returns there, but you’re going to need that catalyst of better growth or a better policy outcome, reform, etc… That’s going to give you that catalyst to unlock the value in those valuations.”

The outcomes of the 2024 national elections appear to be the biggest point of speculation for local economy and market observers at this point.

But barring any major headwinds, 2024 is expected to bring with it lower inflation and interest rates, and lower levels of load shedding, which should all serve to give the local economy a much-needed breather.