Adriaan Pask | Chief Investment Officer | PSG Wealth | mail me |
Over short periods, markets can be unpredictable, and 2025 confirmed that reality. We anticipated volatility, and the year delivered it.
Few expected stability from the US administration or swift resolutions to geopolitical tensions. Nevertheless, several fiscal and monetary developments surprised markets, both locally and globally. These shifts provide important signals about future direction and potential volatility.
Importantly, not all of these surprises were negative. The Rand has performed far better than most forecasts suggested. In addition, South Africa’s removal from the Financial Action Task Force grey list in October reduced perceived country risk. Together, these developments mark a meaningful step from the grey list to growth. They also reinforce the idea that structural progress can translate into market confidence.
Currency dynamics and the global backdrop
Alongside these gains, key state-owned enterprises have shown incremental improvement. This progress has begun to build momentum that could extend into 2026. However, currency movements require a broader context.
Much of the Rand’s recent strength reflects dollar weakness rather than domestic factors alone. Global central banks have reduced exposure to US Treasuries and increased gold holdings. As a result, the dollar has softened, supporting emerging-market currencies, including the rand.
Crucially, domestic fundamentals now reinforce this external support. Eskom’s latest results point to a stronger financial position. Transnet remains a constraint, but early signs of recovery have emerged as volumes improve. At the same time, the Government of National Unity remains politically volatile, as expected. Even so, it increasingly signals a more coherent policy direction.
Domestic fundamentals and institutional credibility
Institutional credibility has also strengthened. The South African Reserve Bank has consistently communicated on inflation, policy and economic risks. This clarity has supported confidence. Meanwhile, broader indicators have turned more constructive.
The Purchasing Managers’ Index has improved, confidence levels are recovering and vehicle sales continue to gain momentum. That said, global risks remain significant. Concerns about a potential market bubble in the US deserve attention.
In our investment process, valuations remain a central focus. We avoid overpaying for assets. By most measures, US equity valuations appear stretched. While valuations rarely predict short-term movements, they strongly influence long-term returns. A market pullback, therefore, remains possible.
Current valuation levels suggest one may occur at some point. However, history offers an important caution. As Peter Lynch observed, many investors lose money waiting for corrections rather than enduring them. Those who consistently call market tops often remain sidelined for years. Consequently, shifts in monetary and fiscal policy deserve close scrutiny.
Investment implications for 2026
In the US, higher interest rates and fiscal restraint initially clouded growth prospects. More recently, the administration has influenced the Federal Reserve to ease conditions. Leadership changes may also support lower rates in the near term. Although this dynamic raises long-term concerns, it supports markets in the short term.
Fiscal policy has also shifted. Early debates focused on reducing deficits and improving efficiency. In practice, federal spending remains elevated. Policymakers have prioritised growth-supportive measures. When easier monetary conditions combine with sustained fiscal spending, betting against the economy becomes more complex.
For investors, balance remains essential. Risks are elevated, but excessive caution carries its own dangers. Sitting in cash or waiting for corrections can prove costly. Many high-quality businesses still generate strong free cash flow at reasonable valuations. Defensive positioning should therefore coexist with growth exposure.
Market timing and attention
In the South African context, the opportunity set remains compelling. While US valuations look stretched, local assets remain inexpensive, even after a 30% market rally. From grey list to growth, banks continue to generate cash and pay attractive dividends. Free cash flow yields remain elevated. These conditions create room for investors to act with confidence.
If a US pullback occurs, global markets may sell off sharply. South African assets would likely follow in the short term. However, we expect a rebound toward more normalised valuation levels. This expectation aligns with the broader transition from grey list to growth, underpinned by improving fundamentals.
The key question is timing. Investors may find better entry points if markets retreat. However, delaying participation also risks missing further upside. This trade-off requires careful judgment rather than market timing.
Another notable trend deserves attention. Despite a strong Rand, foreign investors have not returned to South African equities. They have resumed bond purchases, but equity inflows remain limited.
Most current buying reflects improved sentiment among domestic institutions. Should the US capital rotate into long-neglected markets, South Africa screens attractively on valuation metrics. Importantly, many macroeconomic and political constraints have eased over the past year. As we approach 2026, they provide a credible underpin for South African assets and a more constructive investment outlook.