When geopolitical tension escalates in the Middle East, South African investors are not responding to headlines. They are responding to a chain of effects that moves quickly through oil prices, the currency, and capital flows. Understanding how these forces interact is far more useful than reacting to the news cycle.
By Etienne Viljoen, chief investment officer at Aurora Capital SA
The most immediate pressure point is oil. South Africa imports close to 90% of its oil requirements, which leaves the economy highly exposed to sustained price increases. A 10% rise in oil prices can lift domestic inflation by roughly 35 to 40 basis points. That matters in an environment where the South African Reserve Bank is increasingly focused on anchoring inflation closer to 3%.
The complication is that this is imported inflation. Interest rates are a blunt tool in this context. That creates a policy mismatch. While the Reserve Bank may need to adjust its expected rate path in response to rising inflation, higher rates do little to offset the underlying cost pressure coming from energy. Instead, the effects are transmitted elsewhere. Bonds may come under pressure as yield expectations adjust, equities face margin compression, and consumers absorb the direct impact through higher fuel and food costs. Disposable income tightens, and demand follows.
Safe havens
At the same time, global risk sentiment tends to deteriorate. Periods of heightened geopolitical tension typically trigger a move away from risk assets and towards perceived safe havens. For emerging markets like South Africa, this often translates into capital outflows from both bonds and equities, weaker currency dynamics, and higher funding costs. Foreign investors may demand additional yield to compensate for risk or hedge currency exposure more aggressively. New allocations tend to slow. In many cases, they stop.
The rand sits at the centre of this dynamic. It weakens both as a function of risk-off sentiment and as a result of the oil price shock itself. While currency depreciation can support exporters, it also feeds back into inflation through higher import costs. These are not independent effects. They reinforce each other.
There is, however, a partial offset through commodities. Higher gold and platinum group metal prices can support export receipts, improve the profitability of the mining sector, and contribute positively to tax revenues and foreign exchange reserves. This can provide some support to the current account and, at the margin, to the rand. The limitation is that these benefits are concentrated, while the cost impact is economy-wide. Higher fuel and food prices still filter through to households and businesses regardless of mining performance.
Liquidity advantage
From a portfolio construction perspective, the priority in this environment is not to predict outcomes, but to ensure that the portfolio does not require perfect conditions to perform. Liquidity becomes critical. Cash and high-quality, short-duration instruments, particularly government bonds, tend to provide stability and optionality. They allow investors to navigate volatility without being forced sellers of long-term assets.
Certain sectors may offer more defensive characteristics. Healthcare, consumer staples, and utilities typically benefit from more stable demand profiles. Gold and other precious metals can act as hedges, though they are often highly sensitive to news flow and can be volatile. The energy sector may benefit from rising prices, but this tends to reverse quickly if the geopolitical situation stabilises. In all cases, valuation discipline matters. Defensive assets do not protect if they are bought at the wrong price.
A true worst-case scenario would involve sustained disruption to key global shipping routes such as the Strait of Hormuz, the Red Sea, or the Suez Canal. In such a scenario, oil prices could move sharply higher, potentially exceeding $150 per barrel, with short-term spikes even higher. At those levels, demand would begin to decline, but not before material damage is done. The result would likely be a global recession, severe supply chain disruption, higher freight costs, and a sharp repricing of risk assets. Emerging markets would face intensified capital outflows, currency weakness, and funding stress.
Managing risk
Against this backdrop, the most consistent mistake investors make is to adjust long-term portfolios in response to short-term events. Volatility in growth assets does not equate to permanent loss unless positions are forced to be realised. What matters is whether the underlying portfolio is constructed to withstand stress. That includes appropriate diversification, sufficient liquidity, and a clear understanding of time horizon.
Periods of dislocation are uncomfortable, but they also create opportunities if capital is deployed with discipline. Quality assets can become available at more attractive prices during episodes of extreme volatility. Acting on those opportunities requires preparation rather than reaction.
South Africa does not escape global shocks, but it does not absorb them uniformly either. The economy remains vulnerable due to its reliance on imported energy, sensitivity to global capital flows, and constrained fiscal capacity. At the same time, it retains important sources of resilience. A diversified commodity export base provides countercyclical support. The domestic bond market remains relatively deep, and the Reserve Bank has maintained credibility in its inflation-targeting framework. The financial system itself is sophisticated, allowing for effective risk management and hedging.
The impact of geopolitical tension is therefore uneven. For investors, the task is not to predict geopolitical outcomes, but to understand how those outcomes translate into markets, and to build portfolios that can absorb that translation without being forced into reactive decisions.