Investment Perspectives - Q2 2026

Highlights

The Iran war, which began on 28 February, continued to dominate markets, with the closure of the Strait of Hormuz pushing Brent crude above $100 a barrel in early Q2, before a US-Iran memorandum of understanding on 17 June brought prices back to near pre-war levels around $70. That de-escalation proved incomplete, with fresh strikes in late June a reminder the truce remains fragile heading into Q3.

Kevin Warsh's confirmation as US Federal Reserve chair marked a shift in tone. At his first meeting on 17 June the Fed held rates at 3.50% - 3.75%, and with May inflation breaking above 4% for the first time in three years, market pricing moved from cuts to debating a hike. Locally, the SARB delivered a further 25 basis point hike in May, taking the repo rate to 7%, a defensive move rather than the start of a new cycle. Despite the backdrop, US equities posted their best quarter in six years, driven by an extraordinary wave of AI-related capital spending.

On the local credit front, Fitch upgraded South Africa's sovereign rating to BB from BB- on 5 June, its first upgrade of the country in around 21 years. Coming just seven months after S&P's own upgrade, two of the three major agencies have now moved in South Africa's favour within a year, some welcome local news in a quarter otherwise dominated by global shocks.

Asset Class Performance

South African equities declined over the quarter, with the Capped All Share Index down 2.4% (-3.0% year to date), as resource and precious metals counters weighed heavily following sharp pullbacks in gold and platinum from their 2025 highs. Basic Materials alone cost the index 6.6 percentage points, while Financials did the heavy lifting, with banks adding 2.4 percentage points as a sector. Listed property also had a strong quarter, returning 10.0%. Notably, Naspers/Prosus, last year's biggest single detractor, stabilised as the drag from its Tencent exposure eased. Tencent's roughly 30% decline over the past year reflects a broader pattern of markets splitting into AI winners and losers, with Chinese consumer internet platforms on the losing side. The broader market remains meaningfully below February's record high.

SA bonds were the standout local asset class, with the All Bond Index returning 7.9% for the quarter (4.2% year to date) as long yields drifted lower on improving risk sentiment and the oil price retreat, a rally notable given the SARB's May hike, which the market read as credibility-enhancing rather than the start of a cycle. Inflation-linked bonds returned 6.5% for the quarter but remain the stronger performer year to date at 5.3%. The rand weakened 4.3% over the quarter (-1.1% year to date) to around R16.20, with Fed-driven dollar strength outweighing a credible SARB and an improving credit story.

Global equities (MSCI ACWI) rallied 14.3% in dollar terms (11.6% year to date), with technology contributing roughly 70% of the quarter's return. This was less a mega-cap AI story than a memory and semiconductor one, with stocks like Micron, SK Hynix, AMD, Intel and Applied Materials the standout contributors, compared to NVIDIA which was one of the more modest gainers within its own sector, a sign leadership has rotated toward AI hardware. The global equity rally has not been a purely US story. A handful of Asian technology and semiconductor names now make up roughly a third of the emerging market index by weight, trading well below their US peers despite comparable earnings growth. The picture is more nuanced year to date. Microsoft was the single largest detractor across the entire index, as investors grew choosier about which parts of the AI chain are monetising the buildout. Energy was the only negative sector against the oil price round-trip. Global bonds had a harder quarter as yields rose, while global property was modest.

Macro Update

The path of global growth has been more eventful than expected coming into 2026. The IMF's pre-war baseline held at a steady 3.3%, before the conflict forced a downgrade to 3.1% in its April reference scenario, with adverse and severe war scenarios as low as 2.5% and 2.0%. With de-escalation coming faster than that reference case assumed, growth looks to be tracking closer to the better end of that range.

On where we sit in the cycle, most developed economies remain late-stage, with tight labour markets and limited spare capacity, conditions that would typically argue for a slowdown. What's unusual is that an AI-driven capex boom has provided a fresh growth engine late in the cycle, though it has made growth more bifurcated. AI infrastructure investment appears to be carrying the headline number while small businesses, housing and lower-income consumers are showing far less momentum. Low private-sector leverage is one reason few expect a “hard landing”, but dependence on a single investment theme is a fragility worth watching. That bifurcation runs across borders too, as economies with a foothold in the AI stack have decisively outperformed those without one, meaning this cycle's dispersion is being driven as much by structural AI exposure as by traditional macro variables.

US core inflation has climbed back to 3.4%, and the Fed's June meeting was read as a hawkish tilt, with roughly half of voting members flagging a further hike. The counterargument is that this is predominantly a supply-side story (i.e. tariffs and the oil shock), rather than a genuine reacceleration in demand, and the Fed could be more inclined to hold, with cuts more likely delayed into 2027.

In South Africa, the SARB's May statement was cautious. Headline inflation accelerated to 4.0% in April, almost entirely a fuel story, prompting a raised inflation forecast (4.4% for 2026) and a cut growth forecast (1.2%, from 1.6%). Unemployment rose to 32.7%, and Governor Kganyago flagged a further hike in July as possible. This remains a shock-driven pause rather than a derailed recovery, with Q1 still positive, the sixth consecutive quarter of expansion. Set against the credit upgrade, near-term pressure should be read against a longer-term structural improvement story spanning energy, logistics and fiscal consolidation, which continues to underpin our investment case for South African assets.

Portfolios

We entered 2026 with a constructive, risk-on mindset. When the Iran conflict broke out in February, we chose not to react sharply, since conflicts of this nature have historically proven transitory, with equities in past geopolitical supply shocks typically dipping only modestly before rallying strongly. That judgement has been tested by a longer, messier de-escalation than we hoped, but our constructive stance has held, and the quarter's price action has, on balance, validated that discipline.
Last year we upgraded global equities to overweight, the right call, with markets continuing to run, led by the memory and semiconductor supply chain rather than the broader tech complex. Our own managers, however, have been underexposed to that narrow segment, and our global equity returns have disappointed as a result. Tellingly, several mega-cap 'quality' names our managers favour, Microsoft chief among them, were themselves among the index's largest detractors year to date, a reminder that stock selection within the AI theme has mattered as much as broad exposure to it.

That underexposure reflects a valuation view we still hold. The US market is expensive on several measures, with leadership narrowed to very few names. That premium isn't unreasonable given AI capex is expected to drive roughly half of S&P 500 earnings growth this year, and Q1 results beat expectations by the widest margin in four years, though it leaves little margin for error. In contrast, SA equities remain cheap on their own history and developed markets outside the US sit close to fair value, an important part of why we retain conviction in the broader equity overweight even as our foreign managers have lagged.

The AI-led rally may be due a pause, which could allow rotation into laggards such as small caps, banks and value stocks, precisely where our managers are positioned. Despite bubble fears, AI infrastructure demand still looks durable, and genuine bubbles have historically required the cheap money and speculation that come with actual rate cuts, conditions still some way off.

We remained disciplined through the quarter's volatility, reaffirming our overweight in both SA and global equities despite the disappointing offshore manager returns, while upweighting SA bonds to neutral from underweight. Looking ahead, we remain cautiously constructive but alert to a narrower path than markets are pricing. The Iran conflict has de-escalated but is not resolved, and the Fed's 28-29 July meeting, alongside the SARB's own July decision, will test whether inflation concerns ease or intensify. Equally important will be the Q2 US earnings season, confirming AI capex is translating into durable revenue growth rather than capacity yet to be monetised. US midterm elections in November are also worth watching, as volatility has historically picked up into these contests.