Fairtree Outlook 2026 | Macro and Markets

Macro outlook

The fade of easy money and rise of uncertainty

A sensible starting point for the year ahead is to locate where we are in the policy cycle.  Globally, central banks delivered roughly 100 basis points of GDP-weighted rate cuts during  2025. As inflation continues to ease and global growth slows, we expect core central banks  to keep cutting until policy rates reach their terminal levels, effectively bringing the monetary  easing cycle to a close

Graph 1: The global policy rate is nearing the terminal rate – Core central bank rates, GDP – weighted

As at Jan 2026. Source: IMF, Bloomberg, Fairtree. Core central banks: US Fed, ECB, BOJ, BoE, BOC, RBA & SNB.

The policy baton is likely to pass to fiscal authorities in an attempt to extend the cycle. Yet  this is becoming an increasingly delicate balancing act. Debt burdens and fiscal risks are rising  across many developed markets, US equity valuations remain elevated, and policymakers  are operating in an environment of heightened political and geopolitical uncertainty.

Notably, traditional safe havens such as the US dollar and US Treasuries offered poor  protection in 2025. By contrast, precious metals, selected emerging market assets and some alternative investments proved more resilient. Even here, selectivity mattered: digital assets disappointed, raising the question of whether parts of that market, alongside certain AIrelated names, are caught up in a bout of irrational exuberance, and what catalyst might  ultimately deflate it.

While periodic stress has surfaced in areas such as private credit, regional banks, unprofitable technology and long-duration bonds, none has threatened global financial stability. The US  Federal Reserve (Fed) has remained ready to step in if needed. Overall, markets still appear to be in a broadly pro-growth, pro-cyclical phase, but one increasingly shaped by policy uncertainty rather than policy clarity.

Easy monetary policy nearing a turning point

A key question for the year ahead is whether more central banks are nearing the end of their  rate-cutting cycles. Markets already expect several, including the Bank of Japan, Reserve Bank of Australia, Reserve Bank of New Zealand and Bank of Canada, to move towards rate  hikes over the next 12 months. Over the past two years, a combination of high but falling inflation, monetary easing and resilient consumer activity provided a supportive backdrop for  markets. In the US, roughly 5% nominal growth helped underpin earnings, and while equities performed well, returns were solid rather than exceptional.

Graph 2: Markets are starting to price hikes for some banks (bps)

As at December 2025. Source: BCA Research, Fairtree. 12-month market expectations as per overnight index swaps

US consumer activity was weak in the first half of 2025 but recovered meaningfully as the year progressed. Beneath the surface, however, K-shaped dynamics continue to define the economy. Higher-income households, responsible for the bulk of spending, remain in good shape, buoyed by rising equity and house prices, fixed-rate mortgages and elevated cash balances. Lower-income households face a far tougher environment, with high living costs
and job losses weighing on spending power.

Combined with productivity gains and shifting immigration policies, the result is an economy growing despite a stagnant labour market, with capital’s share of income rising relative to labour’s.

Graph 3: Consumption growth (GDP) accelerated while job growth (NFP) slowed

As at December 2025. Source: Bloomberg, Fairtree. Non-farm payroll jobs added per year vs real GDP consumption

The positive interpretation is that productivity is improving, though the gains have largely accrued to capital rather than workers. A small portion of recent productivity gains may be linked to AI; their more meaningful productivity boost may still lie ahead. Much of US growth in early 2025 was driven by AI and technology capital expenditure, while consumption lagged. With interest rates still restrictive, it is difficult to see labour markets recovering meaningfully without further policy easing.

The One Big Beautiful Bill Act will add fiscal support through tax cuts, though the primary beneficiaries are likely to be higher-income households. Meanwhile, inflationary pressures appear set to fade. Housing momentum has weakened, shelter costs are falling, labour market slack is increasing, and wage growth is slowing. The inflationary impact of tariffs on goods should also continue to ease.

These dynamics should allow the Fed to cut rates from around 3.75% towards its estimated neutral level of roughly 3%. Chair Powell’s term ends in the second quarter, questions around Fed independence may re-emerge, and his successor is likely to adopt a more dovish stance, raising the possibility that rates fall faster and further than current market pricing implies. Further cuts would support markets if driven by disinflation rather than recession, though the approaching end of the easing cycle could trigger a broadening and rotation in equity leadership, with stretched US growth and technology stocks giving way to value.

Looking further ahead, the lagged effects of fiscal stimulus, regulatory easing and lower rates could eventually reignite inflation pressures, potentially setting the stage for renewed rate hikes over a two-to-three-year horizon.

In Europe, the European Central Bank (ECB) has already cut rates to 2%. President Lagarde has described policy as being in a “good place”, with inflation close to target and consumer activity improving as real incomes recover. While US tariff risks have eased and sizeable fiscal commitments to defence and infrastructure have been agreed, the region continues to face structural headwinds. Manufacturing remains under pressure from Chinese competition and a stronger euro, while energy costs remain elevated relative to pre-war levels. Although markets expect the ECB to remain on hold, further rate cuts, an additional one or two, may still be required to support growth. Inflation is contained, and with a firm currency and a soft economy, upside risks appear limited. More meaningful growth momentum may emerge later in the year, aided by policy easing and reflation efforts in China.

In the UK, economic data have surprised modestly to the upside, but the slowdown remains evident. With inflation expected to decline further, the Bank of England (BoE) may have room to cut rates more aggressively than markets currently expect, potentially two to three cuts towards 3%.

What stands out across both the Fed and the BoE is the unusually wide dispersion of views among policymakers. Disagreement is at its highest level in years and is mirrored among investors. Regardless, 2026 is likely to mark the end of the easing cycle for many core central banks, a shift that could usher in meaningful changes across markets, particularly in economies where housing activity remains strong and rate hikes are already being priced in.

Growing divide between the West and Global South geopolitical spheres

A widening divide between the Western world and the Global South has become one of the defining features of the current geopolitical landscape. In recent years, economic fragmentation has accelerated as trade tariffs, the war in Ukraine and more assertive US foreign policy actions have reshaped global power dynamics. The emphasis has shifted decisively towards nationalism, strategic autonomy and national security, often at the
expense of economic efficiency and multilateral cooperation. We expect this trend to persist, and in some cases intensify, over the coming years.

While trade tensions between the US and China eased somewhat over the past year, with tariff rates reduced and selected goods flowing more freely, this détente is unlikely to prove durable. Strategic rivalry remains unresolved, and the Taiwan question is likely to re-emerge as a key flashpoint. More broadly, recent US actions in Venezuela signal a willingness to intervene more forcefully in support of strategic interests. This may embolden other major powers, notably China and Russia, to act more assertively within their own spheres of influence.

Graph 4: China’s trade with the US has slowed, but trade with the rest of the world increased (US$ bn)

As at November 2025. Source: Bloomberg, Fairtree.12-month rolling of China exports to different regions

In the Middle East, while the intensity of the Israel–Hamas conflict in Gaza has subsided, the risk of escalation remains elevated. Iran continues to loom large, ensuring a sustained US strategic focus on the region. Domestic unrest and protests within Iran point to deep economic malaise and social strain, increasing the risk of policy missteps or external confrontation as a means of consolidation.

The economic consequences of this more fractured world are becoming clearer. Countries increasingly recognise the strategic importance of securing access to key commodities, both industrial and technological, as well as those critical for defence and social stability. At the same time, governments are actively diversifying supply chains, foreign assets and reserve holdings to reduce reliance on any single bloc or currency. Gold, other precious metals and
selected industrial commodities have been notable beneficiaries of this shift.

For smaller, open economies, the ability to navigate both sides of this geopolitical divide is becoming increasingly important. South Africa, in particular, has at times struggled to reconcile its foreign policy positioning with the expectations of its traditional Western economic partners. Inconsistent or poorly communicated diplomatic actions remain a key risk to the country’s growth outlook.

From an investment perspective, traditional geopolitical hedges have been less reliable. US Treasuries and the US dollar have, at times, failed to provide effective protection during periods of heightened geopolitical stress. As a result, investors are increasingly turning to alternative assets to enhance diversification. In this environment, gold and precious metals continue to play an important role as portfolio hedges against geopolitical and political
uncertainty.

China: The reflation challenge

China’s economy continues to grapple with the after-effects of sweeping regulatory crackdowns across key sectors, most notably technology and property. These interventions have weighed heavily on consumer and business confidence, leaving domestic demand subdued. To offset the drag from a prolonged housing downturn, policymakers have leaned aggressively into a supply-side growth strategy, promoting what they describe as “new productive forces”. These include advanced manufacturing, grid expansion, electric vehicles, batteries and semiconductors.

Production and consumption in these sectors have been heavily subsidised, providing a nearterm boost to output. At the same time, China has sought to offset higher US tariffs by cutting export prices and redirecting trade flows towards emerging markets, Asia and Europe. The resulting surge in exports has acted as a deflationary force abroad, benefiting consumers, but placing pressure on manufacturing hubs struggling to compete. This strategy has kept China’s exports remarkably resilient, and they remain a key driver of growth, a dynamic we expect to persist.

The trade-off, however, has been rising domestic deflationary pressure. By prioritising supply over demand, China has reinforced an environment in which nominal growth remains weak, below 4%, and consumers are incentivised to delay spending, with consumer prices still flirting with negative territory. Authorities are now attempting to reflate the economy by boosting demand through subsidies and income support, but the scale of these measures
has so far been modest and unlikely to shift behaviour meaningfully at a broad level.

Policy support will nevertheless continue, and we expect China to meet its official 5% growth target again, largely driven by exports and, to a lesser extent, manufacturing. Consumption should improve, but it is unlikely to become a dominant growth engine in the near term. A sustained recovery in the housing market remains the most important catalyst for restoring confidence. After several years in recession, activity appears closer to a bottom.

Graph 5: China’s housing activity remains in a multi-year contraction

As at November 2025. Source: Bloomberg, Fairtree.12-month rolling floor space under construction and stated – sqm millions.

From an investment perspective, policy dynamics have become more supportive. Authorities are actively backing markets, stabilising the currency and incrementally opening capital markets to foreign investors. China remains investable, but patience and selectivity remain essential.

South Africa: Reforms begin to bite

South African markets delivered strong returns despite weak economic growth, elevated political uncertainty and ongoing foreign policy concerns. Equity performance was narrowly concentrated, led by precious metal miners and dual-listed technology names such as Naspers and Prosus. While we expect precious metal prices to remain well-supported, leadership is likely to broaden towards diversified miners, benefiting from higher industrial metal prices, as well as domestic-facing sectors, including retailers and banks.

Although headline growth has disappointed, the underlying fundamental backdrop is improving. The impact of long-awaited network reforms is beginning to filter through the economy. Empirical studies suggest such reforms typically take up to three years to show up in economic data, with peak benefits only materialising closer to year six. One of the most significant reforms implemented last year was the formal reduction of the inflation target to 3%, with a 1% tolerance band.

Inflation continued its decline, supporting real disposable incomes, and survey data from the Bureau for Economic Research suggests inflation expectations are becoming anchored closer to 3%—potentially faster than markets anticipated. This gives the South African Reserve Bank scope to continue cutting rates towards a neutral level, which we estimate at around 5.5–6%. Lower rates should support both consumers and businesses. Credit penetration remains low, but recent private-sector data indicate lending activity is already accelerating. Consumer confidence is also improving, albeit from depressed levels.

After several quarters of stagnant fixed investment, conditions may be turning. Third-quarter GDP data showed a welcome contribution from gross fixed capital formation, supported by both public and private sector spending. Business sentiment has also improved. Looking into 2026, we expect consumption and investment to become the primary growth drivers, lifting growth above 1.6% currently priced in by the market.

On the consumer side, lower fuel prices, subdued inflation, declining policy rates, improving credit availability and a modest wealth effect should provide support. Consumption should benefit from higher commodity prices. Mining profits typically rise with a lag, ultimately feeding through to wages, investment and government revenues.

On the fiscal front, we remain confident that the National Treasury will maintain its consolidation path. A sustained primary surplus and lower funding costs should see the debtto-GDP ratio peak and begin to decline over the coming years. S&P Global has already acknowledged these improving dynamics by upgrading South Africa’s sovereign rating, albeit still below investment grade. The country’s removal from the FATF Grey List has further eased capital flows. Strong foreign inflows into local bonds last year could be followed by renewed interest in equities, supported by attractive valuations, robust emerging market
demand and improving domestic fundamentals.

Graph 6: Credit rating agencies acknowledge fiscal, political and reform progress – S&P Global Credit rating for South Africa debt

As at December 2025. Source: S&P Global, Bloomberg, Fairtree.

Equity leadership is therefore likely to broaden towards locally exposed companies. Key risks remain political. The impact of potential leadership changes in both the ANC and DA on the GNU and reform agenda needs close monitoring. Municipal elections, potentially in the fourth quarter, and poorly handled foreign policy decisions could reintroduce volatility, particularly in the rand. These risks warrant close monitoring, but they do not negate the improving medium-term outlook.

Market outlook

Equities: Robust fundamentals to driver returns

Global equities delivered stronger-than-expected returns in 2025, supported by falling inflation, easier monetary policy, resilient consumption and positive AI sentiment. Returns were driven by broad-based earnings growth. This performance came despite persistent recession fears, softening labour markets, record US tariffs and elevated policy uncertainty. Beneath the headline numbers, several themes emerged that are likely to remain relevant in 2026.

Chart 7.1: Equity index returns for 2025 – An exceptional year for ex-US assets

As at December 2025. Source: Bloomberg, Fairtree Assets with US$ sign next to it, denotes US$ returns.

Chart 7.2: Asset returns for 2025 – Precious metals provide defence

As at December 2025. Source: Bloomberg, Fairtree Assets with US$ sign next to it, denotes US$ returns.

Ex-US equities outperformed as US exceptionalism peaked:

While the MSCI World Index returned 21.1%, performance was driven increasingly by markets outside the US. The MSCI World ex-US rose 31.8%, compared with gains of 17.3% for the MSCI US and 17.7% for the S&P 500. This marked the largest relative outperformance of non-US markets in more than 15 years. Elevated US valuations, rising policy uncertainty and improving growth prospects elsewhere have prompted investors to rebalance portfolios away from US
assets, a trend we expect to persist. Europe stands out as a region to watch. The Euro Stoxx 600 gained 36.8%, supported by banks and defence stocks. Increased fiscal spending, subdued inflation and continued support from the ECB are creating a more attractive investment backdrop.

Emerging markets benefited from low valuations and improving fundamentals:

Emerging markets were a major contributor to ex-US performance. The MSCI Emerging Markets Index rose 33.6%, with South Korea, Chile and South Africa delivering returns above 40%. Brazil, Mexico and China also performed strongly, with gains of around 30%, while India and Taiwan lagged behind their peers. Notably, heightened tariffs and geopolitical risks had less impact than feared. Rising commodity prices, low starting valuations, China’s export resilience and subdued inflation all supported returns. With emerging markets still undervalued and under-owned, we expect the asset class to continue outperforming.

US equity performance because less concentrated:

US market leadership broadened as the year progressed. While early 2025 gains were heavily concentrated in large technology stocks and the “Magnificent Seven”, dispersion increased into year-end. The Nasdaq rose 20.7%, still outperforming the S&P 500. Within mega-cap technology, returns varied widely: Alphabet gained more than 60%, Amazon roughly 5%, and Nvidia, now the largest stock in the index, almost 40%. AI optimism has lifted valuations, which remain elevated. With AI capex expected to slow, the focus will shift to how productive those investments have been. While no immediate catalyst threatens the AI premium, it remains a key global equity risk. We expect US equities to continue performing well, supported by easing monetary policy and fiscal and regulatory support, but to lag peers. A weaker US dollar, down roughly 10% in 2025, also contributed to relative underperformance and is likely to remain a headwind.

Currencies: Rands benefits from a weaker US dollar

The rand showed strong appreciation despite weak growth, political uncertainty and foreign policy pressures. It appreciated 13.8% against the US dollar—the best annual performance since 2009—and strengthened broadly against dollar-bloc currencies, Asia and most emerging market peers. Three factors underpinned this move: US dollar weakness, strong demand for emerging market assets and improving domestic fundamentals. These forces should remain supportive, though we expect more modest gains in 2026.

The US dollar remains vulnerable

On real effective exchange rate and purchasing power parity measures, it appears to be 10–20% overvalued. The US twin deficit, large fiscal and current account gaps, continues to rely on external portfolio inflows. As investors reassess US exceptionalism and diversify away from US assets, these flows are becoming less reliable. Policy uncertainty and questions around the dollar’s safe-haven and reserve-currency status have further eroded confidence. Investors who benefited from years of unhedged dollar exposure are increasingly raising hedge ratios. Monetary policy dynamics also favour a weaker dollar, with the Fed expected
to ease further in 2026, lagging other core central banks.

Strong demand for emerging market assets should support emerging market currencies:

Fundamentals in emerging markets are strong and valuations are attractive. Lower US rates, firmer metal prices, lower oil prices, China’s resilience and subdued market volatility provide a constructive backdrop for emerging markets and emerging markets carry trades.

Chart 8: Rand volatility has dropped, making the currency more attractive – 90- day USD/ZAR volatility (annualised)

As at January 2026. Source: Bloomberg, Fairtree.

Importantly, low and stable inflation across many emerging markets gives policymakers room to ease without undermining risk premia, as fiscal dynamics have improved relative to developed markets. Consensus expects emerging markets growth to accelerate from 4.2% in 2025 to 4.3% in 2026, and we expect more assets to flow into the asset class.

Local factors continue to support the rand:

The rand benefits from a lower country risk premium as reflected in the fall in 10-year CDS from around 3% to 2.4%, a sovereign rating upgrade by S&P Global and removal from the FATF grey list. The lower inflation target, gradual economic reform, attractive valuations and high real interest rates have lifted.

Local government bonds: As good as it gets?

South African government bonds delivered exceptional returns in 2025. The All Bond Index rose 24.2%, the strongest calendar-year performance since 2000, following a 17.2% gain in 2024. Improving domestic fundamentals, economic reform momentum and strong foreign inflows drove returns. For offshore investors who left rand exposure unhedged, total returns exceeded 42% in US dollar terms. Naturally, expectations for a repeat performance in 2026
should be tempered.

Chart 9: SA bonds delivered its best performance on record

As at December 2026. Source: Bloomberg, Fairtree.

The rally reflects structural rather than cyclical improvements. Inflation fell sharply from around 8% in 2022 to below 3% in 2024, with core inflation only following in 2025. The formal reduction of the inflation target to 3% ±1% represents one of the most important policy reforms in decades. Inflation expectations have declined meaningfully, enhancing central bank credibility.

If inflation settles near target and the real policy rate remains around 2.5–3%, the SARB could cut rates by a further 75 basis points, taking the repo rate to 6% or lower and bringing total easing to around 225 basis points. Given policy lags, these cuts should increasingly support growth, sentiment and investment. A lower inflation target also reduces long-term risk premia and improves export competitiveness.

These improvements are evident in asset pricing. Long-bond yields have fallen almost 400 basis points since the April 2024 election-related stress, the 10-year spread versus US Treasuries is the tightest since 2007, and CDS spreads have narrowed sharply, closing the gap with Brazil. Lower funding costs, improved growth prospects and rising mining revenues should help stabilise debt dynamics. National Treasury’s focus on a primary surplus,combined with a potential fiscal anchor, increases the likelihood that the debt-to-GDP ratio peaks and begins to decline.

While bond valuations are no longer cheap, they are not yet stretched. Inflation may undershoot expectations, the SARB could cut more than the 50 basis points currently priced, fiscal outcomes may surprise positively, and further rating upgrades are possible over the next 12–18 months. We therefore see scope for yields to fall further, though returns are unlikely to match the past two years. Potentially low double-digit returns.

Risks remain. Political instability, municipal elections later this year, foreign policy missteps, lingering State-Owned Enterprise (SOE) risks, weaker commodity prices or a hawkish shift by the US Federal Reserve could all weigh on sentiment.

Emerging market local debt: Attractive opportunities

Other high-yielding emerging market bond markets also look attractive. Latin American countries, such as Brazil, Colombia and Peru, face elections this year, which may create reform momentum but also short-term volatility, often an opportunity for investors. Strong carry, low volatility and sustained demand continue to support emerging market local debt.

Global government bonds: Dispersion amongst developed markets’ rates

The most likely path for the front end of the US government curve remains lower. Easing inflation and a soft labour market may give the Fed scope to cut more aggressively than currently priced. High debt levels, fiscal pressure and monetary policy uncertainties may keep long-term yields somewhat elevated, leading to a bull-steepening of the yield curve. Outside the US, expected rate cuts by the ECB and Bank of England should support bond markets, but the positive fiscal thrust in Europe may keep longer yields higher. We believe UK fiscal concerns fade over the coming year, leading to lower long-term yields. Japan remains the outlier, where fiscal stimulus and rising inflation could prompt faster-than-expected tightening.

Chart 10: Back-end bond (30-year) yields rose on fiscal dynamics

As at December 2026. Source: Bloomberg, Fairtree.

Credit: Late cycle dynamics are a headwind

Credit spreads are tight across the US, Europe and South Africa. While fundamentals remain solid, late-cycle dynamics increase the risk of spread widening and higher defaults. In multi-asset portfolios, we prefer equity and duration exposure over credit risk.

Commodities

Oil

Brent crude fell from around US$75 to the low US$60s in 2025, easing global financial conditions alongside a weaker dollar and lower interest rates. Lower oil prices benefit consumers, particularly in emerging markets where fuel remains a large budget component. We expect oil prices to stabilise around US$60, with modest upside risks.

Supply is likely to continue outpacing demand. Strong production growth from the US and other non-OPEC producers should persist into 2026. Even if OPEC+ cuts output, it is likely to do so to balance rather than tighten markets. Global growth is expected to stabilise around 3%, slightly below this year’s pace.

Geopolitical risks, such as sanctions on Russian oil or political instability in Iran, pose upside threats, but OPEC spare capacity remains high at around 3.5–4.5 million barrels per day, with Saudi Arabia accounting for more than half. This capacity can be brought online quickly and acts as a buffer against supply shocks. Over time, a stabilisation in Venezuela could lift output, though restoring production will require time, significant investment and political stability.

Gold and precious metals

Gold continued its strong rally, rising more than 65% in 2025 to around US$4,500, despite elevated real interest rates. Central bank demand has surged since 2022, particularly from emerging markets seeking to diversify reserves following the freezing of Russia’s dollar assets. Geopolitical instability, fiscal expansion and concerns about future inflation have reinforced demand. While speculative behaviour has increased and may add volatility, the structural drivers remain intact.

Chart 11: Central banks doubled their gold purchases since the Russia/Ukraine war

As at December 2026. Source: Bloomberg, Fairtree.

We expect gold prices to remain supported and trend moderately higher. A US mid-term election outcome that shifts political dynamics could add to demand, while the main downside risk remains a sudden hawkish pivot by the Fed. Other precious metals have lagged but began to catch up late in 2025. Platinum, up more than 120%, benefited from jewellery demand, substitution effects and fading electric-vehicle optimism. While fundamentals remain supportive, speculative excess could drive volatility.

Other commodities:

Industrial metals should benefit from rising defence spending across Europe, the US and China, as well as accelerating investment in AI infrastructure, grid expansion and electrification. Supply constraints persist in several industrial and agricultural commodities, and geopolitical tensions are encouraging countries to build strategic reserves. A potential bottoming in China’s housing market could provide an additional boost. Copper and iron ore prices have remained resilient despite the prolonged construction downturn, suggesting scope for upside should activity recover.

Author

Jacobus Lacock

Multi-Asset Portfolio Manager & Macro Strategist
Jacobus joined Fairtree in 2011 and is a Multi-Asset Portfolio Manager & Macro Strategist as well as a Fixed Income Portfolio Manager in the Investment team. Prior to joining Fairtree, he spent five years at Goldman Sachs Asset Management in London, where he served as UK Head of Fixed Income and Currency Product Management. He holds a Bachelor of Commerce Honours degree in Economics from the University of Stellenbosch and is a CFA® charterholder.

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