Fairtree Balanced Prescient Fund Q1 2026 commentary

*Net of fees  

Source: Prescient, 31 March 2025. Fund inception: January 2017

Benchmark: SA – Multi Asset – High Equity Category Average

Geopolitics take centre stage

The Fund returned -2.6% over Q1 2026 and underperformed its peer group. Over the last 12 months, the Fund returned 18.94% and continues to be ranked within the top 20% of its peer group. The Fund continues to provide investors with significant positive real returns and has outperformed inflation by more than 7% since inception.

Coming into 2026, easing financial conditions supported a continued rally in global risk assets. Equities and commodities advanced as front-end rates declined, central banks extended rate cuts, the US dollar softened, and oil traded below US$70 a barrel.

Despite this supportive backdrop, US assets lagged. Policy uncertainty remained elevated, driven by tariffs, concerns around Federal Reserve independence, and geopolitical tensions involving Greenland and Venezuela. Emerging markets initially performed well, benefiting from the weaker dollar and easier financial conditions.

That changed as tensions in the Middle East escalated. US–Israel strikes on Iran, aimed at curbing its regime, military capability and nuclear ambitions, marked a turning point. The closure of the Strait of Hormuz and damage to energy infrastructure pushed energy prices higher, reigniting inflation concerns and prompting central banks to adopt a more cautious stance. A stronger dollar and rising interest rates subsequently weighed on risk assets, with emerging markets underperforming, particularly those exposed to higher energy costs.

The current geopolitical environment calls for caution but also creates opportunity. The duration of the conflict will be critical in shaping outcomes. Stagflation risks have increased, as higher energy prices and more hawkish central banks begin to weigh on growth. Over time, this may force policymakers back towards rate cuts. Some damage is already evident, and vulnerabilities are emerging in private credit, elevated AI expectations, and pressure on lower-income consumers.

In South Africa, higher fuel costs and a less accommodative stance from the South African Reserve Bank have slowed the cyclical recovery. However, it has been delayed rather than derailed. The structural growth story remains intact, supported by ongoing economic and political reforms.

Against this backdrop, the portfolio remains well diversified and liquid, positioned for an eventual improvement in the geopolitical environment. Defensive positioning has been increased over the quarter, while maintaining flexibility to capture opportunities. We remain overweight cash and US government bonds, underweight equities, particularly in the US, and retain an overweight allocation to precious metals. This is an environment that demands active management, underpinned by a strong top-down macro framework and disciplined bottom-up analysis.

Macro overview

The first quarter of 2026 was characterised by a sharp shift in market conditions, moving from a broadly supportive macroeconomic backdrop in January and February to a pronounced risk-off environment in March. Early in the quarter, resilient global growth, easing financial conditions and strong commodity performance supported risk assets. However, a significant escalation in Middle East tensions, culminating in the effective closure of the Strait of Hormuz, triggered a severe energy shock late in the quarter. Brent crude oil surged over 60% in March alone, driving a repricing of inflation expectations, a more cautious policy outlook, and widespread declines across both equities and bonds.

In the United States, markets experienced heightened volatility over the quarter, with early gains reversed sharply in March as the S&P 500 (-5.0%), Nasdaq (-4.8%) and Dow Jones (-5.2%) all declined in March. Investor sentiment was initially supported by resilient economic data, including firm labour market conditions and steady growth, alongside continued enthusiasm around artificial intelligence (AI) investment. However, concerns emerged around the sustainability of elevated AI-related capital expenditure and persistently sticky inflation, with headline CPI at 2.7% year-on-year and core measures in the mid-2% range.

A key development during the quarter was the appointment of Kevin Warsh as Federal Reserve Chair, which helped anchor expectations around institutional credibility and a more orthodox policy framework. The Federal Reserve maintained a cautious, data-dependent stance, keeping rates unchanged while emphasising inflation risks, particularly following the energy shock. US Treasury yields trended higher over the quarter, with the 10-year yield rising from around 4.24% in January to approximately 4.3% by March, while the two-year yield reached around 3.52%. This repricing reflected a combination of resilient growth, rising fiscal and geopolitical risk premia, and a scaling back of expectations for near-term rate cuts, even as some signs of labour market softening began to emerge.

European markets followed a similar trajectory, with improving momentum in January and February giving way to sharp declines in March. Major indices, including the Euro Stoxx 50 (-9.1%) and DAX (-10.3%), fell significantly in March as the region’s reliance on imported energy amplified the impact of the oil price shock. Earlier in the quarter, eurozone inflation had fallen below the ECB’s 2% target and GDP growth printed at 0.3% for Q4, supporting a more accommodative stance. However, the surge in energy prices led to a renewed inflation uptick, complicating the policy outlook. Structural growth challenges and limited fiscal flexibility further constrained the region’s response.

Emerging markets delivered strong performance during the early part of the quarter, supported by a weaker US dollar (down 1.4% in January), improved capital flows and resilient global demand. However, these gains were partially eroded in March as global risk aversion intensified. China proved relatively resilient compared to other regions, benefiting from a more insulated energy mix and prior policy support. PMI data indicated modest expansion during the quarter, while policymakers kept rates unchanged, signalling a preference for stability amid ongoing structural challenges, particularly in the property sector.

Commodity markets were central to quarter dynamics. Precious metals and energy prices surged in January and February, with gold rising above US$5,000/oz (peaking near US$5,500 intra-month in January) and gaining a further 7.9% in February. Platinum group metals also posted strong gains, supporting resource-heavy equity markets. However, March marked a turning point: oil prices spiked sharply, rising 63.3%, while gold declined 11.6% as higher real yields and a stronger US dollar (up 2.4% in March) reduced its appeal. This divergence underscored the complex interplay between inflation expectations, policy dynamics and safe-haven demand.

South African markets reflected these global dynamics, with strong performance in the first two months of the quarter reversing sharply in March. The FTSE/JSE All Share Index rose 3.7% in January and approximately 7% in February, before declining 10.5% in March. Earlier gains were supported by elevated commodity prices, improved fiscal sentiment and contained inflation, with headline CPI at 3.6% in January and easing to 3.5% in February. The 2026 National Budget reinforced a commitment to fiscal consolidation, with debt expected to stabilise over the medium term. However, the global risk-off shift led to a sharp depreciation in the rand (-7.6% in March) and negative bond returns (ALBI: -6.8% in March). The South African Reserve Bank held the repo rate at 6.75%, while signalling increased vigilance around inflation risks following the oil shock. Despite near-term volatility, the domestic macro framework remains supported by fiscal discipline and relatively well-anchored inflation.

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