Jason Swartz, Portfolio Manager, and Tana Mongwe, Head of Responsible Investment Research, at Old Mutual Investment Group
As we prepare to move into 2025, prospects for local markets will be heavily influenced by the new Trump presidency, as well as the future of energy reform in South Africa, particularly when it comes to the deregulation of Eskom.
This is according to Old Mutual Investment Group (OMIG), who hosted a market outlook briefing this week, where its presenters highlighted that Trump administration policy implementation will be the single most important factor to watch next year when it comes to global markets, while South Africa’s economic growth will depend largely on local energy reform, with the energy crisis being far from over.
OMIG Portfolio Manager Jason Swartz underlined incoming president Donald Trump’s widely publicised plans for increased global trade tariffs as a rising risk for both local and global markets. “The inflation outlook is likely to worsen on this basis, causing a review in the Fed’s rate cutting cycle, given that they are unlikely to cut rates as much as previously expected as a consequence,” he explains.
“While deregulation and tax cuts will be positive for US equities, a trade war escalation is not priced in, and is likely to ultimately disrupt supply chains and impact global growth negatively,” he adds.
Swartz believes that in this environment, emerging markets are set to face headwinds in 2025, unless the dollar rally moderates, and commodity prices recover. “However, South Africa is a haven among emerging markets, given our cyclical and secular growth drivers,” he points out.
When it comes to Operation Vulindlela, he believes that significant progress is being made which supports the case for the SA macro-outlook. “Key tailwinds for the programme include a focus on depth, rather than breadth of reform, as well as political buy-in and collaboration between relevant stakeholders.
“Noteworthy successes of Operation Vulindlela include the restructuring of Eskom and opening up of the entity for private investment in electricity generation, logistics reform around the rail system to allow private rail operators to access the freight rail network and operating ports,” he adds. “Water is also seeing tentative improvement in quality monitoring systems and the turnaround of the water use license system, while visa and digital communication reform are also seeing progress.
In addition, local cyclical and secular growth drivers will be largely shaped by the future of South Africa’s energy sector, which over the past sixteen years has been dominated by escalating load shedding. The country is now embarking on a path toward market deregulation, with the Energy Regulation Amendment Act of 2024 leading the charge.
OMIG Head of Responsible Investment Research Tana Mongwe says that despite over 200 consecutive days without load shedding, the energy crisis that has plagued the country for almost two decades, is certainly not over.
“Through the Wholesale Market Code, due in 2026, this reform programme is set to reshape the energy market and presents both risks and opportunities for the future of energy in South Africa,” she explains. “As we move into 2025, there is potential to create a more dynamic, sustainable, and inclusive energy market; however, reform must be handled with care to ensure that Eskom’s transition and the broader energy market changes do not undermine energy security or exacerbate existing inequalities.”
Mongwe highlights that Eskom is too big to fail without causing substantial damage to the country’s energy security and social fabric.
“Market deregulation is therefore essential for SA to secure clean low-cost energy, particularly through the unbundling of Eskom’s generation, transmission, and distribution arms, which will allow greater competition, innovation, and private-sector participation in the energy sector,” she says.
However, fully incorporating Eskom into a free-market system would carry unacceptable social risks and costs, she adds. “While deregulation is necessary, Eskom’s strategic role in the market must be preserved,” she warns.
“The National Energy Regulator of South Africa (NERSA) plays a critical role in ensuring Eskom’s survival. Without NERSA’s support, Eskom may face collapse or require a substantial bailout. The regulatory framework will need to adapt to avoid the need for drastic tariff increases.”
Mongwe points to the rise of competition in the distribution sector, particularly from private players, posing risks for both Eskom and municipalities. It will be essential to manage this transition carefully to prevent widespread disruptions, she adds.
Regarding the longer-term path ahead, Mongwe believes that, following the unbundling process, Eskom Generation should be run as a non-profit organisation (NPO) supported by the National Treasury to ensure its financial sustainability.
“As private energy generation ramps up, Eskom should begin decommissioning its aging power plants, making room for cleaner, more efficient technologies,” she says. “It is also crucial that tariffs for Eskom Generation and Distribution are unbundled, allowing for greater transparency and competition in pricing.”
For reforms to succeed over the long term, regulators must prioritise enabling of existing frameworks, rather than focusing exclusively on new policies, while new institutions should have sound governance structures in place from the outset.
Against the current market backdrop, Swartz is looking at diversifying away from dollar defensives via German bunds or Japanese Yen given relative inflation and growth dynamics between US and the rest of the world. The Old Mutual Balanced fund currently remains overweight SA assets, but is employing currency hedges to manage global exposure, and US equity call options to mitigate a Trump led US rally.
ENDS
