Four themes shaping local and global markets in 2026

Introduction:

The world had barely seen in the New Year when US President Donald Trump shifted straight into fifth gear and arrested Venezuelan President Nicolás Maduro. Trump's "America First" agenda is firmly in place, and the showing in Venezuela illustrates the continued military might of the US. He has also taken an increasingly aggressive posture against the European Union in a bid to take control of Greenland, with subsequent tariffs to be implemented on the bloc. This runs alongside the continued implementation of tariffs, which surprisingly did not hamper economic growth (US third-quarter GDP reaccelerated to 4.4%, and fourth-quarter GDP growth is currently running at 5.4% according to the Atlanta Fed GDPNow estimate). Tariffs surprisingly did not impact inflation to the extent feared (the latest inflation print was 2.7% in December, although it is still above the Fed's 2% target). Even so, the lagged effects of tariff policy may become more apparent as the year progresses.

Chart 1: Reaccelerating US GDP growth

Date sampled: 08-Jan-26
Source: Investec Wealth & Investment, Bloomberg

A critical question is whether we are reaching the end of an era of "US exceptionalism" and, if so, whether we are entering a stage in which value attracts greater attention than growth stocks? This is not a new discussion; a similar question confronted markets at the beginning of 2025.

Geopolitics will remain a key concern in the year ahead. With Venezuela under "US control", what is stopping other powers from arguing their right to do the same? Russia wants to control Ukraine and China may look to follow through on designs to take over Taiwan. The same can be argued for the many territorial disputes around the world, where space increases strategic regional power, whether through supply routes, military presence, resource endowments, etc. Without going into detail, the primary economic concerns relate to the potential for oil price shocks and shocks to global supply networks, which could affect inflation outcomes. The risks are relatively muted at the moment, but are not zero-probability events.

Chart 2: Charting how geopolitics typically affects oil prices

Date sampled: 08-Jan-26
Source: Investec Wealth & Investment, AJC, Global issues

Switching to our home soil, there are many reasons to be positive about South Africa's macroeconomic story. This is covered in detail below, but better fiscal performance, lower inflation (and lower fuel prices), still robust private-sector wage growth, potential rate cuts, structural reform momentum, and rising business confidence all bode well for 2026. Add to these the recent removal of South Africa from the Financial Action Task Force grey list and the S&P Global credit rating upgrade of South Africa's sovereign debt (from BB- to BB).

Theme 1: One big, beautiful South Africa

South Africa will likely face pressure from the US on economic and foreign policy, as well as on economic redress endeavours, a continuation of 2025. Importantly, the US's actions last year did little to veer South Africa off track from its structural reform endeavours and efforts to create a stable macroeconomic environment.

The stage for a better South Africa is set in many ways:

• GDP growth appears to be moving in the right direction, toward exceeding population growth, which should translate into better living conditions, as measured by GDP per capita. Lower inflation is likely to be bad for nominal GDP, though. GDP growth above 2% in 2026 is not outside the realm of possibility, though this outcome is more likely from 2027 onwards. Growth forecasts may not fully reflect ongoing reform efforts. Improving growth outcomes will also underpin better performance in the so-called SA Inc shares. The improvement in GDP growth, however, will need to be sustained for market participants to buy into the recovery story fully.

Chart 3: SA GDP growth forecasts

Date sampled: 20-Jan-26
Source: Investec Wealth & Investment, Bloomberg

• South Africa's 10-year government bond yields have declined to 8.2% (from a peak of 12.5% just after the 2024 national election). This provides a basis for an improved fiscal environment, with lower borrowing costs meaning that the government will likely be better able to allocate resources to growth-enhancing areas and service delivery objectives. The S&P Global credit rating upgrade was positive, and the path of least resistance appears to be towards investment grade rather than remaining sub-investment grade. This will take a few years, but more credit rating upgrades are likely, driven by continued fiscal improvement, political stability and reform momentum.
  
  
• A decomposition of the 10-year government bond yield gives us a sense of the risk premium on South African assets. The recent reduction in the risk premium ascribed to SA assets has been driven by lower inflation, improving fiscal outcomes and structural reform momentum, particularly state-owned enterprise (SOE) performance (energy and ports). Our internally developed SOE index has SOEs performing at their best levels since 2021.

Chart 4: SA SOE performance index running at four-year high

Date sampled: 14-Jan-26
Source: Investec Investment Management, Stats S.A, ESKOM, Transnet

• The rand has strengthened against the US dollar and was trading at R16.01 at the time of writing. The currency had traded as high as R19.93 to the dollar around "Liberation Day". This could provide meaningful downward pressure on inflation. That said, administered price inflation, such as electricity costs, remains a risk. Lower inflation is no doubt good for local interest rates, and we expect them to fall over the coming year, which should support household spending. Petrol prices are also at their lowest in around four years (driven by Brent crude prices and the rand), another positive catalyst for household spending.

Chart 5: Food inflation tailwinds for SA

Date sampled: 15-Jan-26
Source: Investec Wealth & Investment, Bloomberg

Chart 6: Petrol price inflation tailwinds for SA

Date sampled: 21-Jan-26
Source: Investec Wealth & Investment, Bloomberg

• Resurging business confidence will likely lead to better growth outcomes. The South African Chamber of Commerce and Industry (SACCI) business confidence index, which uses high-frequency economic data to gauge broader business conditions, was structurally higher in 2025 than in previous years. This will likely translate into higher (lagged) Bureau for Economic Research (BER) business confidence numbers. Even though the BER uses a different methodology, it has tended to move in the same direction.

Chart 7: Slight rebound in BER business confidence, trend will be key

Date sampled: 04-Dec-25
Source: Investec Wealth & Investment, Bloomberg

• The rally in long bond yields has yet to be reflected in SA Inc equities. There is a fundamental bullish case for SA Inc stocks (listed companies whose fortunes are linked to the performance of the South African economy) over the coming year. Moves in the long bond yield typically correlate with moves in SA Inc shares. Still, this relationship has been weaker of late. Last year, bonds returned 25%, while our basket of SA Inc shares rallied around 7%. A stronger currency is also typically good for SA Inc, but this has not yet been fully reflected in share prices.
• Precious metals are likely to have a positive effect. The sizeable moves in precious metal prices have already benefitted the fiscus (although we await key revenue data for December, February and March). This may lead to improved private-sector investment (mainly in the mining sector, with a lag in other sectors) and job creation (if improved business conditions, driven by structural reform, materialise). More jobs will likely lead to greater spending power, with a positive impact on retail spending, credit extension, and vehicle sales (which have been strong, mainly driven by cheaper vehicles from China).

Chart 8: SA commodity-basket prices still rallying

Date sampled: 14-Jan-26
Source: Investec Wealth & Investment, Bloomberg

• Local government elections will be key. One of the key structural constraints for South Africa is local government. Local government performance is a key factor for business conditions, as we have seen in the form of business closures linked to poor service delivery by municipalities. The government is reviewing how local government operates and is exploring the ringfencing of revenues. The review will be key in tackling the issues in local government.
• The stability of the GNU will also be key. What will be important will be the ability of market participants to look past "the noise" of politicking by the different parties. The general performance of the Government of National Unity (GNU) has been good and has been a major contributor to the improvement in the South African story. For example, coalition governments rarely stabilise fiscal finances, yet the Budget deficit is shrinking and is expected to continue to do so. We refer to this 2024 article on the formation of the GNU, and the outcomes so far are in line with, or better than, the projections then.
• More reasons for fiscal positivity. When the Minister of Finance presented his Medium Term Budget Policy Statement late last year, we had an internal sense that National Treasury was erring on the side of caution. There are many reasons to believe the Budget coming up in a few weeks will be a good one, based on the likely underestimation of GDP growth and conservative revenue numbers.

Chart 9: Not much is needed to exceed the consensus forecast for SA growth of 1.2%

Date sampled: 20-Nov-25
Source: Investec Wealth & Investment, Bloomberg
 

Theme 2: US growth, inflation and interest rates

Full-year growth expectations for 2025 are mostly in line with the expectations from the beginning of last year. Forecasts had initially been affected by concerns about the effect of tariffs on growth and inflation, but these didn't play out as expected. Consensus expectations for US economic growth are at around 2.1% for 2026.

Chart 10: Global growth forecasts, US to slow?

Date sampled: 20-Jan-26
Source: Investec Wealth & Investment, Bloomberg

The impact of tariffs was expected to play out through the inflation channel. But we have not yet seen the noticeable impact on economic growth that was expected to play through the inflation channel. The inflation channel argument was premised on the idea that input costs would negatively affect consumption spending, corporate profitability, wage growth and the labour market more broadly.

Chart 11: US inflation to stay well above 2%

Date sampled: 20-Jan-26
Source: Investec Wealth & Investment, Bloomberg

Looking ahead, labour market trends will remain key. Earnings growth projections will likely be impacted by the lagged effects of tariffs following a year of decent "double-digit" earnings growth. There are signs of a weakening labour market; for example, there is now excess labour supply, implying that wage bargaining power will likely shift from workers to employers.

Chart 12: Signs of labour market dislocations

Date sampled: 20-Jan-26
Source: Investec Wealth & Investment, FRED, St Louis Fed

The rate trajectory will likely remain uncertain. The Fed will likely remain cautious in an environment where growth is still robust and inflation is not unequivocally out of kilter (although the Institute for Supply Management's prices paid index continues to signal upward pressures). Employment dynamics may be more important and should the labour market weaken more, there is an increasing case for the Fed to cut rates more aggressively.

The case for fiscal stimulus is precarious, given elevated government debt. The fiscal and inflation risks are likely captured in the 10-year yield, which hasn't responded to the fall in official interest rates. Pressure from the Trump administration is a concern, but it is worth noting that the composition, voting structure, and independent views of the Federal Open Market Committee (FOMC) will make it difficult for political interference to prevail within the broader monetary system.

Theme 3: Volatile policy, uncertain growth, inflation, monetary policy, stretched valuations and elevated fiscal risks may undermine the US dollar 

Like last year, the performance of the US dollar will likely be a key driver for global equity market performance for 2026. A weaker dollar typically coincides with periods where ex-US markets outperform the US. For example, US markets rallied around 17% last year while ex-US equities outperformed (Europe +36.7%, Japan +26.1%, UK +35.2%, SA +63.5%).

On a valuation basis alone, the US dollar remains expensive, even after its decline in 2025 (-9.4%).

Chart 13: Real trade-weighted dollar is still elevated

Date sampled: 14-Jan-26
Source: Investec Wealth & Investment, Bloomberg

The second consideration is whether the US economy will remain on its path of exceptionalism. Recent GDP growth data continues to show robust economic activity driven by substantial personal consumption expenditures and net exports. The strength of personal consumption expenditure going forward will likely be informed by labour market dynamics and how inflation influences demand. There are still risks to the inflation outlook given the potential lagged effects of tariffs. The market expects US growth to slow this year, and a moderation in US economic activity will likely weigh on the US dollar.

The third key consideration is US monetary policy dynamics. The Federal Reserve is in an unusually difficult position: the US economy remains robust (even though growth is expected to moderate), while inflation is not yet at the target rate of 2%. However, labour market dynamics will be a more important consideration, and recent data show the labour market is weak. Therefore, the continuation of and/or depth of the cutting cycle is unclear. The base case is for the Fed to continue cutting interest rates, which is typically negative for the US dollar, as yield differentials make it relatively less attractive to invest in dollar-denominated instruments.

The fourth consideration is the policy terrain. Policy uncertainty will likely weigh on the dollar, and how tariff policy is executed will be key. A continuation of an overly expansive fiscal strategy will also likely weigh on the dollar, as with corporate tax cuts, increased spending and a high debt burden. This will influence whether the fiscal path is sustainable.

Assuming dollar weakness in 2026, commodity-producing countries like South Africa should benefit from improved terms of trade, as commodity prices generally rise. This should be good for government revenue collection and fiscal performance. The period between 2002 and 2008 is instructive: elevated commodity prices supported the South African economy, with growth averaging 4%-5% and the unemployment rate falling from 28% to 21%.

Stock markets outside the US should continue to outperform, suggesting an asset allocation that favours non-US markets.

Chart 14: S&P 500 meaningfully underperformed global markets in an environment of USD weakness

Date sampled: 20-Jan-26
Source: Investec Wealth & Investment, Bloomberg

A large portion of global trade is priced in dollars, which would make imports relatively cheaper and help bring down inflation worldwide. Eurozone inflation remains contained, providing scope for the European Central Bank (ECB) to continue cutting interest rates. Growth dynamics in the region, although improving, remain weak and monetary and fiscal stimulus provide a solid base for better growth.

Institutional independence will be key. The continued attacks on Fed Chair Jerome Powell inspire little confidence in the Federal Reserve's independence, even though there are many strong members of the FOMC and it is unlikely that a change in the chair will result in an automatic deviation from independent monetary policy setting.

Policy stability will be important too, and any policy seen as negative for US growth will likely exert downward pressure on the US dollar. With mid-term elections at the tail-end of the year, one would expect policy to aim to contain inflation. A stronger dollar is one mechanism to moderate inflation.

Theme 4: Is it "Big in Japan"? 

We have been positive about Japan for a while, and we highlight some of the themes behind our view.

The Bank of Japan faces two unique challenges. The first is an environment where inflation has been elevated, but December saw significant moderation. Even so, inflation remains above the central bank's 2% target. The second is the growth environment: we haven't yet seen a meaningful improvement in growth (although the Bank of Japan forecasts that growth will continue to rise, with slight upward revisions at the last monetary policy meeting).

These dynamics make it challenging to forecast the trajectory of interest rates over the coming year. The Bank of Japan hiked interest rates in February 2025, a move that preceded volatile global markets amid the unwinding of the so-called carry trade (investors who had borrowed in yen to buy other assets when Japanese rates were low). The market is currently pricing in two 25bps (a quarter of a percentage point each) hikes for the year, suggesting higher volatility may follow.

Another significant trend to watch is the rise in Japanese bond yields, which heightens the risk of a Bank of Japan intervention. That said, central bank officials have been quick to pour cold water on this, according to recent comments.

Beyond the monetary policy dynamics, it is important to consider the fiscal plans announced in 2025. The fiscal stimulus is expected to provide cost-of-living support, make strategic investments and increase defence spending. As mentioned above, Japan faces a prevailing inflation problem, and thus efforts to curb inflation (manage the cost of living) should boost household spending by freeing up disposable income.

The yen is still undervalued and should find support from higher rates, which should narrow yield differentials between Japan and the rest of the world (particularly the US).

Japanese equities should benefit from better nominal GDP numbers (a consequence of the 2025 inflation dynamics). Increased liquidity from the stimulus should provide meaningful support for Japanese equities as well. So too should corporate reforms that aim to strengthen compliance and transparency to attract foreign portfolio investment. The market similarly still screens cheap, which should be supportive of a positive re-rating should the reform story hold. The market is both under-owned by offshore investors and is less sensitive to the technology sector.