IPOs are starting to emerge, and banks and corporates are starting to re-leverage their balance sheets, especially as the One Big Beautiful Bill encourages capital spending at a time of falling rates. Secular change is under way in the US economy, triggered by the massive investment in AI by the hyperscalers. This is translating into capex growth and backstopping economic activity. Productivity gains are nascent but starting to become evident.

The US is the most innovative market in the world, and despite concerns about the overvaluation of hyperscale's and other pockets of tech shares relative to their history, the speed of AI development means that portfolios cannot be underweight the US in the short term.

While we still seek diversification away from the US due to concentration risk and debt issues, earnings delivery is less evident in Europe. We are starting to see more breadth in the US market: improved performance is spreading beyond the so-called Magnificent 7 stocks into the wider S&P 500 and Russell 2000 Index shares, and there is a shift from value to growth as a style factor. When regimes shift (factor changes) and economic expansion starts showing up (in, for example, manufacturing PMI), it means on balance we should remain constructive on equities, and risk assets more broadly, at the outset of 2026.

Naturally, there are risks. Last year we highlighted that increasing capex spend by hyperscalers would probably curtail stock buy backs and remove a leg of support from the market. As we currently see, disruptioncan affect existing businesses and sectors. There is also a disconnect on themacro level between the high valuations of risk assets and subdued expectationsof interest rates and inflation. In our scenario approach, which we constantlyreview, our two most likely scenarios both imply risk-on positioning. Improvinggrowth but shifting interest rate expectations could change the pay-off profileof equities and the dollar, with some significant knock-on impacts.‍

How does this compare to positioning a year ago?

‍As in 2026, we began 2025 with a positive view on markets, as we expected more significant capex spending on AI by the hyperscalers (in fact, they spent even more than we had anticipated). We did not fear a recession in the US as we believed that President Donald Trump’s policies on deregulation, taxes and tariffs taken together were business-friendly. We got the sequencing of those events wrong: Trump implemented tariffs first, and did not act on deregulation and taxes at the same time. Chaotic announcements and calculation methodologies around tariffs unsettled markets, lifted bond yields and created unease about the future impact on inflation.

However, we maintained a pro-risk stance for all assets throughout the year, including on bonds, due to easing monetary policy around the world, money supply growth, a commitment in Europe and Japan to increase defence spending and take other fiscal actions, decent corporate earnings, andthe tail wind of a weakening dollar. Together, this created a strong environment for equity and credit markets. Overall markets ended where we expected - but there was a lot of noise in between.‍

Our view on South African assets

‍We have been constructive on SA for the past few years. We positioned our funds to take advantage of the opportunities in SA bonds and SA mid-caps and domestic equity ahead of the 2024 election. We are now moreneutral on bonds. The valuation argument in real yield remains compelling butdomestic bond spreads against corporate credit and emerging market peers are tightly priced now. We are therefore looking for better tactical opportunities.

We use currency hedging, and were short dollars, yen and pounds last year, which made money for the portfolios. We do not anticipate any further rand strengthening as we believe positive structural changes to the economy are now priced in. The dollar appears to be undervalued at present.

Our multi-asset portfolios have enjoyed returns from the rapid gains in the gold price over the past year, but the team believes goldhas become too speculative at present. Gold is part of our longer-term strategic asset allocation, but we are conscious that there is gold exposure inthe passive holdings of South African equity and, as a very risk aware team, we will not enjoy the traditional correlation benefits that gold historically could provide at this point.‍

Where we see pockets of value at present

‍In our strategic asset allocation in the STANLIB Multi-AssetGrowth Fund and STANLIB Multi-Asset Cautious Fund, we are most positive on SAlisted property and SA equity, developed market equity and emerging marketequity. We are neutral on local bonds, and negative on domestic cash, globalcash and global bonds. An important consideration for us is the correlationsbetween the rand, South African bonds and South African equities.

In our South African equity exposure, we are skewed towardsfinancial shares. South African banking shares have rallied, but earningsmultiples are still attractive, profitability is strong, and there is avaluation argument relative to global companies. Importantly, the team believesSA banks present a better opportunity than SA bonds.

We also prefer South African listed property. Yields aredecent, structural issues are behind the sector, and although performance hasalready been delivered, the position is being held because it deliversequity-type returns with less volatility than equities. That helps withportfolio construction, especially given the skew away from precious metals.

Unlike some of our peers, we are not enthusiastic aboutSouth African retail shares. There is a perception of value because retailcompanies’ valuations are low relative to history, but the South Africaneconomy is only growing at around 1.8%. With increased competition from Amazonand Shein, it is difficult to see how South African retailers will grow. Ourprocess is not highlighting this as a great opportunity for a meaningfulallocation. The team would put SA retail into the category of “too hard”.

On global equity, the Multi-Asset team is bullish about thechanges that AI promises to bring. The roll out of AI will benefit the broaderUS stock market.

Outlook

We believe that “peak Trump” could be behind us: President Trump is losing the backing that he needs to push through dramatic policy changes. In the US mid-term election late this year, the Republican Party appears to have only a 20% chance of retaining a majority in the House of Representatives. In the last month there has been pushback from the US Supreme Court on Trump’s removal of Lisa Cook as US Federal Reserve (Fed) governor, some Republicans have openly downplayed Trump policies and global leaders have started to oppose US bullying tactics. The Fed has vocally supported its independence, and the nomination of Kevin Warsh as the next Fed chair is a better outcome than expected (especially when paired with Scott Bessent at the Treasury).

Diversification and nimbleness will be essential to manage fixed income markets successfully in 2026, when the two biggest risks could bea strengthening dollar and local political instability.

The Fixed Income team manages the STANLIB Flexible IncomeFund, which has started the year overweight (versus its benchmark) in bonds andmodified duration. We believe the short end of the bond market is relativelyexpensive compared to cash, but the longer end (10 years and more) still offersscope for appreciation. The team has increased exposure to the credit marketsince late last year, as we see credit spreads contracting. Credit offers moreattractive returns than cash. We also like inflation-linked bonds (ILBs), as webelieve inflation has peaked.

The fund has taken an overweight position in offshore assets. The recent announcement that Kevin Warsh will be the next chair of the US Federal Reserve (Fed) is positive for the credibility of the Fed. Warsh was the best of all contenders for the job, as he is an orthodox economist with previous Fed experience. Although there has been some concern that he will be under pressure from President Donald Trump to cut interest rates aggressively, one man is not the institution. Warsh will have to persuade the other 11governors on the Fed’s Federal Open Market Committee of the need for interest rate cuts. As a result, we think US monetary policy, under Warsh’s chairmanship, will go back to being boring and data-driven.

A year ago, the team was also constructive on the bondmarket, expecting a stable political environment, structural reform, GDP growthand a slowing, but not recessionary, US economy. Some of that optimism wasmisplaced. The US Liberation Day tariff announcements and disagreements amongGNU partners over the National Budget caused the market to sell off sharply andwe rapidly moved to underweight bonds. That turned out to be a costly move,because the market subsequently rallied quickly. But we constantly interrogateour positions and made a quick recovery to overweight bonds again, whichresulted in good returns for the year.

There are several reasons for our decision to maintain an overweight position in South African bonds. One is the country’s adoption of a lower inflation target of 3%. We believe South African inflation peaked at 3.6%and could even fall below 3% in 2026, giving space for three or four interest rate cuts by the South African Reserve Bank – which is more than the two cuts that the market has priced in. However, local political developments are still a risk.

Another reason for bullishness on SA bonds is the improvingfiscal environment, which is expected to be highlighted in the upcoming Budget.Structural economic reform is not yet priced into the market, nor is thepossibility of a credit rating upgrade. The term maturity spread is still at 65basis points, which is where it was a year ago – if there is a rating upgrade,that spread will tighten.

While a weakening rand presents risks, not only for bondsdirectly but also for its effect on SA’s terms of trade, the team is hedgingthe risk by buying dollars. However, the base case view is that the rand couldstrengthen over the next year.

Foreign buying of South African bonds has increased over thepast year but is still not at historical levels. It will not revert to thoselevels unless the country regains its investment-grade credit rating from theagencies, which will take time.