Global Energy Shock

The energy shock is moving into the real economy much faster than most desks anticipated. Three weeks into the US Iran conflict, the Strait of Hormuz is effectively impaired, and with Brent pushing past 112 dollars, we are no longer looking at a price spike but a structural bottleneck. While the strip implies an eventual return toward 80 dollars by late 2027, shipping confidence takes far longer to rebuild than a ceasefire takes to sign. Our house view is that Brent remains a primary headwind north of 90 dollars through the second quarter.

In South Africa, the transmission is immediate and painful. Energy spikes are hitting fuel and fertiliser which together account for nearly half of farm input costs. The fact that the vast majority of our grain moves by road adds a second layer of pressure to a food inflation trajectory that had only recently moderated below 4 percent. The FRA market is currently pricing in nearly 100 basis points of SARB tightening, but we disagree with that move. Hiking into a supply driven shock would be a mistake for a consumer whose consumption is already set to decelerate toward the 2 percent mark this year. Our base case is that the SARB holds.

We expect the worst of the volatility and dislocation to be concentrated in the first half of 2026. As alternative supply routes come online and the initial shock gets absorbed into base effects, the second half should bring a calmer environment, albeit one where oil prices remain structurally higher than pre conflict levels. Into 2027 we see a more realistic backdrop: elevated energy costs persist as a feature rather than a crisis, volatility normalises, and markets begin to reprice around a new equilibrium rather than reacting to daily headlines from the Gulf.

Our positioning across the JSE reflects this view. We see the most compelling value in food retail, where the sector is trading in the mid 15s on a forward PE basis, a significant discount to the long term average of roughly 19x and a rare entry point into high quality defensive cash flows. We also remain overweight on banks, where dividend yields in the 7 to 8 percent range provide a robust margin of safety. Conversely, we are avoiding discretionary retail where clothing pricing power has effectively vanished against global disruptors. Until we see a durable peace, protecting the downside is the only trade that matters.