Macro Pulse Episode 27

Hello and welcome to Macro Pulse. This is the first episode of 2026, and I’ll be sharing your outlook for the year with you, which I will characterize as being cautiously constructive.

Let’s look at the big picture. Growth is stable. Inflation is moderating and central banks continue to cut interest rates. This keeps us constructive on both growth as well as markets. But we draw caution from the fact that policy uncertainty remains high. And we see increased geopolitical fragmentation around the world. The good news is that this provides opportunity. But let’s step back and put these drivers into context. On the growth side, we saw that economic conditions have eased. We saw a reduction in interest rates over the last year. A weaker US dollar as well as low oil prices. This all combined supports businesses and consumers. Consumers has been very resilient. So that the wealth effect has been very positive. They’ve got strong balance sheets and able to spend. But that spending is constant weighted towards the higher income consumers of the market. So you have this dynamic that the economy is growing fairly well, but the jobs market is also slowing. And we put this down to productivity gains, but also to the fact that those high income consumers are the main ones that is spending in the economy. This dynamic obviously is not sustainable, but for now it is supporting growth. So when we look at the jobs market as well as some valuations, it does appear that we are light cycle but different to price cycles.

The fed is cutting interest rates not because of fears of recession but because inflation is coming down. How much further the fed will cut rates is a big debate at the moment. In our view, we see the fed cutting rates to around 3% because inflation is still moderating. We see that the tariff impact on inflation last year hasn’t been as much as what was expected. We also saw that China remains a big deflationary force to many parts of the world, and that cyclical tailwinds to lower inflation, like a low oil price and low shelter inflation is still working through the economy. So the US will be able to cut interest rates. We also think that the ECB and the Bank of England will be able to cut rates further. With this in mind, it does bring us potentially to the end of the cutting cycle across global central banks and something we need to think about for 2027. That easy money will potentially end this year, and we may see a reemergence of inflation down the line. Think about it that this year we have a decent consumer, but we have very similar to fiscal as well as monetary policy. And this may be the breeding ground for future inflation potential risk for 2027. What would be interesting to watch though, is that the new fed chair. Remember, Jerome Powell term expires this year in April and Donald Trump is nominating a new figure. The market is concerned that this new feature is less independent. And what would be interesting is to see if this new feature will be willing and bold enough to hike interest rates when indeed we see a reemergence of inflation.

But that’s a risk, I think, for the next 18 months. For now, we still see as the easing conditions as being constructive. It will support markets, specifically those cyclical assets like equities, commodities and emerging market assets will continue to perform well when we look at the US performance last year, we had returns of close to 20%, which was decent, but we had exceptional returns from markets outside of the US, in particular emerging markets and South Africa, which returned to the tune of 50 to 40%. And we believe this trend will likely continue in 2026. Markets outside of the US will outperform the US? The US exceptionalism will continue to fight as a result of high degree of policy uncertainty, but also because of better opportunities elsewhere. Emerging markets continue to benefit from a decent consumer. Low inflation. Central banks, that is, so continue to cut interest rates, better valuations, a weaker US dollar, and so we think emerging markets remains a bright spot in the near future. We also believe that South African assets will continue to perform well where a decent year last year or very good year last year, with local equities up 43%, local bonds up 24% combined. This has been one of the best years ever for South African investors.

We think that on the equity side, the leadership which is being led by the resources, in particular gold and James, that will broaden out to include also domestic counters, where we see the reforms that has been shaping up slowly starting to bite, as well as the consumer starting to do better on the back of lower inflation, further rate cuts, which we do expect to come through this year, but also a positive wealth effect from the I will increase in asset prices.

On the bond side, we had a phenomenal year last year. We don’t think that those same returns will be gained this year, but we could get to lower double digit returns if we do. We see a decrease in inflation expectations, further rate cuts to potentially 6% or lower, and also fiscal improvements due to higher corporate income taxes from mining revenues. The African rand has remained remarkably resilient. We’ve had a 13% appreciation last year against the US dollar, which is in line with other emerging market commodity producing countries. But we think for this year, the rand can continue to perform well due to the fact that we will see a weaker US dollar. Remember, US valuations is quite high. Fundamentals are, deteriorating and we see the likelihood of more flows out of the US into other markets.

Secondly, we think that the demand for emerging market assets remains high and continues to improve. That will lead flows into South Africa. Our bonds are well represented within the emerging market bond index, and we could see some inflows into the country as a result. And thirdly, the local fundamentals we believe will continue to improve as reforms are starting to, have an impact and we see fiscal dynamics improve and therefore also the country’s risk premium starting to contract. So this would all potentially get the rand to below a level of 16 sometime this year. So we remain positive on the rent. So what are the big risks to our outlook? Well, on the global side, we see the risk of authorities in the US, policymakers in the US regarding the economy hot, the reemergence of inflation and then the central bank having to start hiking interest rates again as being the bigger risk.

In that environment, you will likely see the dollar starting to appreciate again. It will put pressure on US equities as well as on potentially US bond yields. We also see that the fact that there is a midterm election coming up later this year in US could add to some policy uncertainty and also believe that this increase in geopolitical fragmentation could lead to unintended consequences of policy mistakes. Some way that could hit investor sentiment or the flow of goods or energy around the world. On the local side, we think the risks stemmed from potential leadership changes in both the Da and the ANC that could compromise the genu or the reform agenda that’s currently on the table. The municipal elections later this year, could provide, in the run up to those elections, could provide some volatility to the market.

The second risk locally is that our foreign policy fails to instill confidence in our major trading partners, international investors or the world’s superpowers. And that also may potentially, hit sentiment towards South African assets. That’s all for this week.

All the best for 2026. And thank you for watching.