The global economic environment remains favourable for risk assets as we move into 2026. High and expanding fiscal deficits across major economies, combined with accommodative monetary policy in key regions, support our expectation for solid growth over the coming year. While tariff implementations and geopolitical tensions have introduced headwinds, these have been largely offset by robust capital expenditure in artificial intelligence (AI) infrastructure and sustained equity market strength, which has bolstered consumption among higher-income households.
Earnings growth expectations in the low teens across major regions remain attractive. However, we note that the US market trades at a significant valuation premium relative to international peers, despite comparable earnings prospects. This premium, coupled with elevated risks around AI-related investment returns and potential dollar weakness, leads us to favour opportunities in non-US markets.
The shifting geopolitical landscape and persistent US fiscal deficits present headwinds for the dollar while supporting precious metals. This dynamic is particularly beneficial for South Africa, given our commodity export base and the fiscal revenues generated from the mining sector.
United States: Strength with emerging risks
The US economy continues to display resilience, with expectations for 2026 GDP growth revised higher. Recent growth has been supported by strong consumption, improved trade dynamics, and sustained investment in AI-related infrastructure. Inflation has continued to moderate, while labour market conditions remain broadly healthy, albeit with unemployment drifting higher and wage growth easing.
Despite this supportive macro backdrop, affordability pressures are increasingly evident among lower-income households. Consumer confidence has softened, reflecting these pressures, even as spending among higher-income consumers remains firm. Easing inflation, moderating wage growth, lower shelter costs, and subdued energy prices should allow for further interest rate cuts.
Artificial Intelligence risks to the economy remain a concern. The scale of capital expenditure is unprecedented, yet visibility on long-term returns remains limited. In addition, elevated profitability among certain hardware providers may normalise at lower levels as competition intensifies, and balance-sheet interdependence via vendor financing among large technology firms creates risk of a domino effect. When combined with high US equity valuations, these risks reinforce our preference for diversification beyond the US market.
The dollar’s long-term trajectory remains negative given its elevated purchasing power parity valuation, expected rate cuts, and ongoing large fiscal deficits. This environment should prove supportive for emerging market assets and commodities.
China: Manufacturing dominance persists
China continues to play a dominant role in global trade. The rerouting of exports through parts of South-East Asia, competitive pricing, and strong growth in technology-related exports have reinforced its manufacturing leadership. At the same time, China’s “new economy” sectors, including AI, electric vehicles, batteries, biopharmaceuticals, and aerospace, are offsetting ongoing weakness in property and domestic consumption.
Weak domestic demand and excess capacity weigh on growth, while rising productivity and expanding high-value industries provide an offset, likely keeping GDP growth near the mid-4% range.
Europe: Cautiously edging forward
Europe’s outlook remains modestly positive. Energy costs have normalised, unemployment remains low, and growth in several Southern European economies has been resilient. Prospects for fiscal support in Germany, a broadly accommodative stance from the European Central Bank, and a willingness to ease regulatory burdens provide incremental support, even as structural challenges persist.
Metal prices supported by structural supply and demand fundamentals
The outlook for metals remains favourable. Reduced confidence in the dollar’s long-term dominance has prompted central banks to diversify reserves, increasing allocations to gold amid geopolitical uncertainty. While gold’s pace of appreciation may slow, ongoing central-bank demand should remain a durable source of support in a multipolar world.
Platinum group metal prices have benefited from declining mine supply and policy shifts, extending the role of internal combustion engines. The EU has walked back its 2035 ban on new petrol and diesel vehicles.
Copper remains well supported by demand from both the energy transition and AI-related infrastructure while supply remains constrained. Mine disruptions are running above normal levels, and the difficulties in developing new mines or expanding existing operations further constrain supply. Nearly half of global copper mines are over 20 years old, and ore grades have declined approximately 40% since 1991, driving up costs and limiting supply response. The rising global geopolitical tensions may encourage hoarding further supporting pricing.
South Africa: Positive momentum building
South Africa appears well-positioned for a relatively strong year. Improved global conditions, firm precious-metal prices and subdued oil prices have supported favourable terms of trade, contributing to strength in the rand and domestic asset markets. Long-dated bond yields have declined to levels last seen several years ago, reflecting improved fiscal credibility and a supportive global backdrop.
Inflation has moderated, providing scope for a more accommodative domestic monetary stance should global conditions allow. Confidence has been further reinforced by clearer alignment between National Treasury and the SARB on inflation targeting, improved fiscal projections, South Africa’s removal from the FATF grey list, and a sovereign credit-rating upgrade by S&P.
Fixed investment momentum is gradually improving. Traxtion announced a R3.4 billion investment to double its rail fleet, adding roughly 5% to national capacity. Additionally, a 25-year concession agreement was signed with International Container Terminal Services Inc to manage Durban Container Terminal Pier 2, increasing capacity by 40%. These developments enable Transnet to move more freight and improve exports, reduce its operational and financial stress, and open opportunities for additional private-sector investment.
We anticipate GDP growth will exceed the Bloomberg consensus estimate of 1.6% for 2026, supported by bumper agricultural crops and robust tourism. Sustaining recent asset price gains will require this performance to continue into 2027, alongside sustained fixed investment and improved service delivery. The outlook for most JSE sectors is positive going into 2026 and we currently favour domestic equity over cash and bonds.
Conclusion
While global conditions are currently supportive, particularly for commodity-linked economies, these tailwinds are cyclical. Over the longer term, South Africa’s investment appeal will increasingly depend on institutional strength and policy execution.
Globally, given the concentration of market capitalisation in large-cap technology companies that benefit from the AI theme, any deterioration in the AI investment narrative could materially impact global markets. We have positioned our portfolios in opportunities that are mostly independent of this theme, in investments that should deliver attractive medium-term returns.
