Advisers face asset allocation complexity amid Middle East tensions
Local equity investors hardly had time to get to grips with the impact of trade tariffs on global financial markets before Israel and the United States’ latest aggression against Iran delivered another shot of uncertainty. Just days after Ninety One’s Taking Stock: Beyond the Rally outlook presentation sought to make sense of the prevailing geopolitics, markets had new, unexpected data to factor in.
Blocking out the noise
Ironically, the key question the asset manager set out to address was whether the promised domestic and US rate cuts still supported a risk-on approach to equities, especially in emerging markets, or whether other geopolitical shocks might trigger a correction from today’s stretched valuations. This development is just such a shock, promising four weeks of travel and supply chain disruption across the Middle East, with pressure on oil prices.
Clyde Rossouw, Portfolio Manager at Ninety One, positioned the 2026 outlook with a quick whip around of last year’s financial market returns. “Last year was a good year for equities both domestically and offshore,” he said. The JSE delivered more than 40% in total returns in rand despite significant shifts in geopolitics and Trump’s incessant fiddling with trade tariffs. But advisers and their clients want to know which of last year’s bull markets will persist, and which will fail.
One possible is that the rand, which has had a spectacular run against the US dollar of late, will revert to its mean. “The rand is unlikely to have another year of strength ... but calling the exact date and time [of its reversion] is going to be hard,” Rossouw said. He also raised concerns that domestic equities will struggle to carry their momentum forward if precious metals fall out of favour. If you strip out gold and platinum group metals, there is little to support domestic equities.
An AI and pharma overlap
The portfolio manager singled out AI as a key theme against which to measure offshore equity decisions. “If AI is going to succeed, it has to be adopted by society [and help us] to become more productive and more effective,” he said. In this scenario, AI creates opportunity sets across sectors, including healthcare. The likes of Glaxo SmithKline, Johnson and Johnson and Pfizer could use AI to reduce their research and development expenditure, and in the process improve the discovery of cures and drugs to make a difference in society.
Predicting whether or not 2026 will deliver another outperformance for equity investors is difficult. “We have had three good years for global equities … [and while] we are not yet in uncharted territory it is unusual to have a three year return of 21% per annum,” Rossouw said. “In any given year, if you put money in the equity market, there is only a 55% chance that you will get more than 10% out of that market index.” Offshore investors may have to look ex-US for growth, while domestically, changes in oil prices or precious metals prices could introduce significant volatility.
Jeremy Gardiner, Director at Ninety One, had a lot to say about South Africa’s prospects, but before he got to the Southern tip of Africa, he delivered his trademark rapid-fire look at all matters foreign. He jumped from undue influence at the US Federal Reserve to the capture of Nicholas Maduro and his wife, Celia to the contentious ‘ownership of Greenland’ issue in a matter of seconds, before offering the South African government some good advice, saying it did not have to comment on or get involved in every global eventuality.
Dollar weakness or rand strength?
He also dumped cold water on those celebrating recent rand strength, noting that “basically everybody” had a great year against a weakening dollar through 2025, and that this was likely to continue through 2026. “The dollar had its worst year in 10-years for a variety of different reasons,” Gardiner said. These include artificially low interest rates and continued pressure from Trump on the Fed to cut rates further to offset the inflationary effect of his trade tariffs.
Gardiner reminded the audience of a long list of financial challenges blighting South Africa, including State-Owned Enterprise (SOE) bailouts; high civil servant wage bill; massive corruption; and a decade of, on average, 0.8% growth. On the plus side, the presenter mentioned being removed from the FATF grey list, private-public partnerships in electricity and logistics; improved throughput at ports; GDP growth of 1.2% and higher; and a stabilising debt-to-GDP. The lack of prosecutions following the Zondo Commission also cracked a mention.
“Our authorities, from a financial perspective, are first world and independent; at no stage have our monetary authorities bowed to any requests from government,” he said. He also welcomed the appointment of Advocate Andy Mothibi as National Director of Public Prosecutions. Rounding off his presentation, Gardiner said local investors should expect noise around the local elections, around November, and uncertainty around the next ANC leader; but that neither event should prove too unsettling.
Advisers can soothe their clients with stories of benign domestic inflation and the promise of three further rate cuts during 2026. “The risks are way overweighed by the positives, and the tailwinds look very encouraging,” he concluded. They can also take solace from the largely pro-consumer National Budget presented 25 February, with most mid- to high-income earners seeing a slight improvement in their income tax dues thanks to inflation-linked adjustments to tax brackets.
High praise for the SARB and Treasury
Taking a longer-term strategic view, Hendrik du Toit, Founder and CEO of Ninety One, offered a broader perspective on South Africa and the evolution of the investment industry. He was also upbeat about South Africa’s prospects, though not as optimistic as 18 months prior.
Like Gardiner, he commended South African Reserve Bank (SARB) governor, Lesetja Kganyago, for holding the line on interest rates and squeezing inflation down, saying this discipline had contributed to South Africa being re-rated in the international capital market context. “The re-rating attracted capital, and that capital has driven asset prices up very significantly,” Du Toit said.
However, systemic issues around crime, political governance and water infrastructure will be more difficult to navigate over the coming three- to five-years. Ninety One’s founder described the President’s latest State of the National address as “pretty okay” before questioning the country’s ability to address the aforementioned challenges. “I have my doubts in certain areas; but I am also quite bullish that South Africans are starting to unite around the issues, pushing against things instead of just accepting them,” he said.
The consensus is that decision-makers in both the private and public sector should prioritise economic growth and job creation to lift the country to its full potential. Ninety One believes the current low inflation, low interest rate environment will encourage investment into infrastructure, and the asset manager backs the resulting construction boom coupled with a renewed focus on agriculture and tourism to create jobs, especially in emerging markets.
A Promethean moment
Du Toit is backing artificial intelligence (AI) to change the developing world. He described an end-2022 visit to Open AI as “chaotic” before labelling the rapid development and adoption of AI a Promethean moment. The reference here is to Prometheus of Greek mythology, whose gift of fire, like AI today, symbolised a transformative advance that carries both human progress and unintended consequences. The big concern is that AI could ‘dumb down’ human capability and innovation.
Reflecting on 35 years in the asset management industry, Du Toit singled out the separation of savings and investment from insurance as a game changer, allowing focused professionals and advisers to grow a fledgling industry into a managed savings pool exceeding USD150 trillion in assets worldwide. He said this capital could finance business and job opportunities over the coming 35 years. Over the past decades, the investable universe has expanded from public markets only to include infrastructure, real estate, private equity and private credits.
Other big shifts include benchmarking and the use of passive instruments such as exchange traded funds (ETFs) to improve exposure management, while technology has taken data management and fee and performance transparency to the next level. Today, the industry is better scrutinised and, by and large, well-regulated.
Writer’s thoughts:
The Israel-US military action against Iran illustrates how quickly the geopolitical underpinnings of global asset allocation can change. Who do you rely on to stay informed about developments and their investment consequences? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
