From grey list to growth: how South Africa is shaping up for 2026

Over short periods, markets can be unpredictable, and 2025 was no exception. We expected a volatile year, and that has certainly played out.

Nobody anticipated a placid administration out of the US or a quick resolution to any of the geopolitical tensions, but there have been some surprises on both fiscal and monetary fronts – both domestically and abroad – that signal where markets may be heading and where volatility could emerge.

Not all of these surprises have been negative.

The rand has performed far better than many expected, and South Africa’s removal from the Financial Action Task Force (FATF) grey list in October has helped reduce perceived country risk. Alongside incremental improvements at some of our key state-owned enterprises, this has begun to build momentum that could carry through into 2026.

While exchange-rate movements are often viewed through a purely South African lens, much of the recent strength in the rand has also been driven by dollar weakness.

Global central banks have been reducing their exposure to US Treasuries while increasing gold holdings — a shift that has weighed on the dollar and, in turn, supported emerging-market currencies, including the rand.

Importantly, this dollar weakness is now being reinforced by improving domestic fundamentals.

Eskom’s latest results point to a strengthening financial position, and while Transnet has been a significant stumbling block, early signs of recovery are beginning to emerge as volumes start to pick up.

The Government of National Unity remains volatile — as politics often is — but it is increasingly showing signs of a more unified policy direction. Institutional credibility has also been reinforced by strong and consistent communication from the South African Reserve Bank on policy, inflation, and the potentially supportive outlook for the economy.

Finally, broader economic indicators are beginning to turn more constructive: the Purchasing Managers’ Index is improving, confidence levels are recovering, and vehicle sales are gaining momentum.

Still, the global backdrop can’t be ignored, particularly concerns around a potential market bubble in the US. In our investment process, we place a strong emphasis on valuations, because we don’t want to overpay for assets.

On most measures, US equity valuations appear stretched.

That said, valuations have historically shown little correlation with short-term market movements, but they remain critical in shaping long-term return expectations.

Our view is that a pullback could occur, and current valuations suggest one might be warranted somewhere on the horizon.

However, as Peter Lynch famously said, more investors have lost money waiting for corrections than in the corrections themselves.

Many who have been calling a market top for years have simply sat on the sidelines. That’s why shifts in monetary and fiscal policy are so important.

In the US, higher interest rates and attempts at fiscal restraint initially made growth prospects more uncertain.

But the administration has exerted influence on the Federal Reserve (Fed) to soften conditions, and changes in the central bank’s leadership could support lower interest rates in the near term.

While a compromised Fed is not ideal over the long term, it’s certainly more supportive for markets in the short term.

On the fiscal side, there’s been a notable shift. Early discussions emphasised addressing the fiscal deficit and improving government efficiency.

However, in practice, federal spending has remained high, reflecting a mix of priorities aimed at supporting economic growth.

Combining that with easier monetary conditions means you need to think carefully before betting against the economy or the market.

For investors, the right approach here is balance. Risks are high, but sitting in cash or waiting for corrections may be riskier.

There are still very good businesses generating solid free cash flow at valuations that are not extreme. Positioning defensively while still aiming for growth remains important.

In the South African context, we are fortunate. While valuations in the US are stretched, South African assets remain cheap, even after a 30% rally in the local market. Banks continue to pay out very decent dividends, they remain cash-generative, and free cash flow yields are still high.

There are opportunities locally that investors can pursue without too much concern.

If we do see a US pullback, most markets will likely sell off in a panic, but we expect South African assets to rebound toward more normalised levels.

The real question for investors is whether to participate now. Yes, there may be opportunities to buy at lower levels if markets dip, but you also run the risk of outsmarting yourself if the rally continues.

Another interesting point is that, despite a very strong rand, foreign investors have not yet returned to South African equities.

They’ve started buying bonds again, but equity flows remain absent. Much of the buying we’re seeing is domestic – driven by improved sentiment among local institutions.

Should US capital begin reallocating into markets that have been ignored for more than a decade, South Africa screens very attractively from a valuation perspective. And importantly, many of the macro and political constraints that weighed on sentiment a year ago have eased.

All of this provides a solid underpin for South African assets as we move into 2026.

Adriaan Pask, Chief Investment Officer at PSG Wealth.

BUSINESS REPORT