We have spent many years analysing the South African economy and financial markets, often from the uncomfortable vantage point of volatility and stalled progress. Yet as we engaged with clients during Stanlib Asset Management’s recent roadshow, we find ourselves increasingly confident that the country is entering a period in which long-awaited reforms may finally begin to deliver measurable economic benefits.
Structural improvements in government finances, inflation targeting, electricity, rail and ports are starting to change the underlying direction of the economy, and if this momentum continues South Africa’s GDP growth could exceed the National Treasury’s cautious forecasts over the coming years.
This brighter outlook is already shaping the way we position our portfolios. Across both fixed income and multi-asset strategies we see compelling opportunities across selected domestic bonds, financial shares and listed property, while remaining disciplined about areas where valuations do not yet reflect meaningful growth potential.
Within our fixed income portfolios we have maintained an overweight position in South African bonds since early 2025. At that stage we anticipated a more stable domestic political environment, meaningful progress on structural reform and improved GDP growth. We also expected the US economy to slow without slipping into recession, which provided supportive conditions for emerging market bonds. Though we reduced our position during the midyear political upheavals, we built our exposure back up once the dust settled, as the fundamental investment case remained intact.
We continue to favour longer-dated South African bonds, particularly those with maturities of 10 years or more. Shorter-dated bonds are now looking expensive, but we believe longer-dated instruments still have room to appreciate. The shift to a formal 3% inflation target reinforces this view. South Africa is on track to meet this target, giving the South African Reserve Bank the space for three or four interest rate cuts. Fiscal conditions are also improving, adding another layer of support. In our view, neither the potential economic dividends from structural reform nor the possibility of a future credit rating upgrade have been fully priced into local bonds.
A sharp weakening of the rand remains a risk and we have hedged this by buying dollars. However, our base case is that the currency could strengthen over the next 12 months.
Our preferred asset classes, as we move into 2026, include South African listed property, South African equity excluding gold, developed market equity and emerging market equity.
From a multi-asset perspective we have been constructive on South Africa for several years. Ahead of the 2024 election we positioned our funds to take advantage of opportunities in South African bonds as well as mid cap and domestic equities. We are now more neutral on bonds because, though real yields remain attractive, spreads relative to corporate credit and emerging market peers have become tight.
Our preferred asset classes, as we move into 2026, include South African listed property, South African equity excluding gold, developed market equity and emerging market equity. Our portfolios benefited from the rally in the gold price over the past year, but we now regard gold as too speculative at present levels. While gold remains part of our longer-term strategic allocation, we are conscious that passive South African equity already includes material exposure to precious metals.
Given the present environment, we do not expect gold to provide the traditional diversification benefits that investors may hope for. Within South African equities, we are overweight financial shares. Though local banking shares have rallied, their earnings multiples remain attractive and profitability remains robust. Compared with their global peers, South African banks offer compelling valuation support. In our view, they now offer better prospects than South African bonds.
We also continue to prefer South African listed property. The sector offers strong yields, many of its previous structural challenges have been resolved, and it has delivered equity-like returns with lower volatility. Listed property also plays a crucial role in portfolio construction, particularly as we reduce our exposure to precious metals.
Retail shares outlook dims
By contrast, we are not enthusiastic about South African retail shares. Though valuations look cheap when compared with historical levels, the economy is growing at only about 1.8%. Meanwhile, competition from Amazon, Shein and other global entrants is intensifying. It is difficult to see how South African retailers will generate strong, sustained growth under these conditions. Our investment process does not highlight the sector as a meaningful opportunity at present and we place it in what we call the “Too Hard” bucket.
The pace of AI development means investors cannot afford to be underweight US equities in the near term.
Globally, advances in AI continue to support our preference for developed market equities, particularly in the US. The pace of AI development means investors cannot afford to be underweight US equities in the near term. Though valuations in the technology sector remain a concern for some investors we believe the potential gains from AI adoption will spread across the broader US market. The US remains the most innovative global market and this innovation will continue to drive returns.
The main reforms undertaken in recent years are beginning to meaningfully affect South Africa’s growth prospects:
- The government is now running a primary budget surplus, an important factor for credit rating agencies.
- The finance minister has approved a formal inflation target of 3% and the South African Reserve Bank is preparing to implement it.
- About 17,000MW of private sector electricity projects have been registered with the industry regulator.
- Transnet has made progress on rail by concessioning lines and undertaking infrastructure maintenance, while an international operator has been appointed to manage Pier 2 at Durban Container Port.
Taken together, these reforms lay the foundation for improved economic growth. Over a three- to five-year horizon we believe South Africa’s GDP growth rate could exceed 3%. As confidence improves, investment tends to follow, creating a self-reinforcing cycle. We believe the early signs of that cycle are already visible. South Africa has a long road ahead, but the direction of travel is improving and we are positioning our portfolios to reflect that opportunity.
• The authors are with Stanlib Asset Management.
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