South Africa has recently seen what could be the start of a recovery in its financial and industrial sectors, but whether this recovery was sustainable all depended on the oil price, an investment analyst said on Tuesday.

"The oil price has an 85 percent negative correlation to the equity markets and therefore globally, financial markets have the potential to recover as long as the pace of oil price hikes eases," said Mark Appleton, chief investment officer at BJM Private Client Services.

The inflation fears as a result of the rapidly rising oil price forced central banks to focus on inflation containment rather than economic growth.

A softer oil price would provide for more flexibility with regard to monetary policy, Appleton said.

"Even if the oil price was just to rise more slowly, this would provide an opportunity for the financial markets to recover as central banks would be able to follow a more accommodative monetary policy to offset economic weakness."

Appleton believed the oil price was likely to stabilise at lower levels.

"Speculative activity should be limited as the US Congress has placed speculative trades under the spotlight – given the continued evidence of demand destruction, this could see the oil price remain below $120 per barrel.

Softer MPC

"Those levels would allow for softer monetary policy which would then feed into boosting economic growth and benefit the markets."

However Appleton was cautious on local interest rates and was anticipating one more 50-basis-point rate hike.

"Unlike the US, our Reserve Bank does not have a duel mandate and thus gives less attention to economic activity when making interest rate decisions."

Unfortunately this ran the risk of an overkill of the South African economy, Appleton said.

Sapa