Morningstar launched its 2026 Investment Outlook last week, bringing together global themes and South Africa’s specific market realities.
After a year of strong equity returns, a sharply weaker dollar, and a surge in commodity-driven domestic performance, financial advisers find themselves navigating clients’ heightened emotions, shifting expectations, and renewed questions about diversification.
Rather than forecasting on where markets will be in 12 months, Morningstar’s Outlook – and its webinar – reframe what advisers and clients should expect from an “outlook” in the first place.
Predictions, Morningstar argues, do more harm than good. They create surprise; surprise triggers emotional reactions; emotional reactions drive investors off course.
As Dan Kemp, Morningstar’s chief research and investment officer (EMEA), told the webinar: “Someone like me sits here and gives you confident pronouncements about what’s coming in the year ahead. The US markets will do this, and government bonds will do that, and unfortunately, that’s complete nonsense. We know that predictions are normally wrong. They’re normally provided with too much confidence, and outlooks can be more harmful than they are helpful.”
Morningstar’s goal is therefore not to forecast; it is to help advisers manage investor behaviour, reduce surprise, and focus clients on the long-term drivers of returns.
Keeping investors from going off the rails
Kemp began with what Morningstar sees as the root cause of most poor investment outcomes: emotional responses to surprise.
Clients imagine that their wealth journey from today to achieving their financial goals is a straight line. But as Kemp said: “It’s an emotional roller-coaster. There are times when investors are feeling great, and that’s normally when markets are up, as we’ve seen this year […] But we know that those times are followed by times when clients feel miserable about their returns […] and that can be really dangerous.”
The danger lies not in volatility itself, but in the expectations that investors bring to it. Over-optimistic expectations create shock, which creates behavioural error.
When investors are surprised – whether by tariffs, geopolitics, or sudden drawdowns – they respond in one of three ways:
- Freeze (stay invested);
- Fight (try to trade their way out of a problem); or
- Flight (change their investments or exit them completely).
Freezing is usually constructive. Fighting and fleeing can cause damage.
Kemp illustrated his point referring to a hypothetical investor who invested US$100 000 in September 2024. In January this year, the investment would be about US$105 000. Then the market declined into early April.
- Investors who stayed invested through the April drawdown were up about US$118 000 in September 2025 – a gain of more than 18% from where they started.
- Those who disinvested ended the period at US$99 500 – down from where they were a year ago.
- Those who “stepped out” of the market for three months missed out on gains of about 12%.
Kemp encouraged advisers to do the following during periods of volatility:
Normalise volatility and persuade clients to ignore the headlines
“We know that we tend to have a big crash in markets about once a decade. And if you’ve got a long-term client relationship […] there will definitely be crashes along that journey. So, the more that you can help prepare them for that, the more that people expect a crash, the less likely they are to be surprised by it,” Kemp said.
Rebalance portfolios
“The ability to rebalance portfolios, to remain invested but take the opportunities created by market volatility to improve the overall expected returns, reduce the overall risk – that is a superpower of investment, and it’s so much better than disengaging from your investments.”
Seek new opportunities
Periods of extreme volatility often provide unusually good opportunities to invest. “And again, that requires the ability of the investment manager to think independently, to have been managing a portfolio that’s well set up for volatility, so that they’re not panicking, they’re not worried about short-term returns, but instead, they can calmly look for opportunities in markets.”
Morningstar’s behavioural insights team proposes three strategies that advisers can use to reduce the likelihood of clients being overwhelmed by surprises and making mistakes:
- Preparation
If your clients expect volatility, they’re less likely to react to it. “If your portfolio managers are thinking about building robust portfolios rather than chasing the latest investing fad, if they’re thinking long term rather than just trying to maximise their short-term numbers, then their portfolios will be better set up, and people more able to take action,” Kemp said.
- Information
Clients will contact advisers during periods of market stress. Having prepared talking points makes these conversations more effective.
- Education
Holistic education about key market trends will reduce the space where surprise can take hold and enable investors to make better decisions and progress towards achieving their goals.
Concentrated US equity indices
Morningstar’s global contributors analysed a structural issue that is increasingly central to portfolio risk: the extreme concentration of US equity indices.
Michael Dodd, a senior fund analyst, explained that although concentration is evident globally, nowhere has this been more evident than in the US, where the so-called Magnificent Seven – Apple, Microsoft, Amazon, Alphabet, Tesla, Nvidia, and Meta – dominate returns.
The top 10 stocks in the US now account for roughly 35% of the overall market, which is up from 18% more than a decade ago, and well above the concentrated levels in the Dotcom Bubble of 1999/2000.
This concentration masks weak breadth and creates vulnerability. One earnings miss or a regulatory change could reset global index returns, Dodd said.
Morningstar’s researchers examined two cases:
- Dotcom Bubble. Concentration contributed to the collapse because valuations were soaring and predicated on profit expectations that failed to materialise.
- Global Financial Crisis (2007 to 2009). Concentration was not the warning sign; leverage and credit excesses were – particularly among some US financial institutions.
This highlights the limitation of using concentration levels alone as a guide to potentially timing the markets. However, investors should be mindful of just how much of their wealth depends on a single theme or group of stocks.
Crucially, Dodd noted that US equity investors are heavily exposed to the AI theme through the weights that the Magnificent Seven stocks have in equity indices.
Even if concentration does not guarantee a downturn, it erodes diversification and makes markets far more vulnerable to sentiment reversals.
Morningstar believes investors can capture opportunities and achieve diversification in:
- US small caps, which are deeply discounted relative to large caps.
- US healthcare, which is one of the few reasonably valued US sectors.
- Emerging markets, which are still offering “further potential upside”, particularly Brazil, Mexico, and China.
- United Kingdom and Europe, where valuations are attractive.
End of the dollar’s reserve status?
After years of dollar strength, 2025 saw a sharp reversal, which led some to question the US dollar’s reserve-currency status – particularly after policy signals by the Trump administration suggested the US might be stepping back from global leadership.
Kemp pushed back on this narrative.
Although the dollar declined sharply this year, it is still, in Morningstar’s view, “a bit” overvalued, he said. “Now, of course, that depends on what you’re comparing it to, but if we look at the rand as the most obvious comparison, then the US dollar is still very overvalued compared to the rand.”
The Big Mac Index suggests the rand is more than 40% undervalued relative to the dollar, which indicates there is possibly still some way to go in terms of dollar devaluation.
However, Morningstar sees no evidence that the dollar’s reserve status is under threat. “And that’s really important because it’s so easy to build other narratives on top of this idea that the global leadership of the US, the global leadership of the dollar, is coming to an end. We don’t think we’ve got there yet. It may happen in the future, but we think it’s too early to include that as one of the likely investment outcomes,” Kemp said.
The surge in the price of gold and enthusiasm for crypto assets have been built on the narrative of the dollar losing its reserve status, but Morningstar views this conclusion as premature.
During the Q&A session, when asked whether declining US exceptionalism will threaten its ability to refinance its debt, Kemp said this is “extremely unlikely”, adding that the US government bond market is currently “well behaved”.
“Even the gyrations that we’ve seen more broadly in markets over the last couple of weeks haven’t really led to big movements in the Treasury bond market, and if you look at relative yields of US Treasuries to other government bonds around the world, then no, it seems very unlikely that it will impact the US’s ability to roll over debt.”
Small group of stocks drove the JSE’s outperformance
Morningstar’s South Africa-specific section assessed the country’s position from local and global perspectives.
Among emerging markets, South Africa has “quietly posted some impressive returns in US dollars this year”, Dodd said.
South Africa constitutes only 3% of the Morningstar Emerging Markets Index, so is generally off the radar for most global investors – this comes through in the investment flow data. Emerging market funds globally saw positive inflows in 2025, whereas South Africa saw continuous foreign outflows, consistent with a multi-year trend.
“What that tells us is that South Africa’s standout performance in 2025 has been delivered without any real foreign investor sentiment tailwind behind it,” Dodd said.
Furthermore, the JSE’s strong performance has been driven by a narrow grouping of stocks – gold- and platinum-mining companies, where elevated precious metal prices have pushed those companies higher.
Where does this leave investors?
Dodd said Morningstar’s valuations implied returns framework sees select pockets of value within the local equity market:
SA resources
The sector is “on the low side” after the 2025 run, and the gold and platinum companies are currently looking somewhat more fully priced. But the local market also has globally integrated diversified mining companies such as BHP, Anglo American, and Glencore, or global businesses with secondary listings in South Africa. Morningstar believes these miners still offer attractive returns when looking at their valuations.
SA financials
In Morningstar’s view, this is the sector that currently presents the most attractive upside for local rand-based investors. South Africa’s big five banks, which are a large component of the sector, all trade at reasonable valuations and have strong fundamentals despite the challenging local economy. These companies are prudently managed. Their credit extensions have been pro-cyclical in the recent interest rate environment, and all have well-capitalised and strong balance sheets.
SA’s place in an emerging market portfolio
Dodd said that for rand-based investors and local investors, Morningstar thinks the South African equity market is still priced to deliver reasonably high expected returns and returns that are higher than developed and emerging market equities (based on its expected return framework).
However, the case for South African equities is less tangible for international investors, Dodd said.
South African equities do offer attractive valuations, potentially compensating international investors for the increased liquidity and currency risk. But Morningstar believes the opportunity cost of allocating to South Africa directly, compared with other larger emerging equity markets, is relatively high. Hence, Morningstar does not have a dedicated position to South Africa in its global funds, for example.
Morningstar believes that allocations to select emerging market countries, such as Brazil and Mexico, which can provide an effective mix of industrials, resources, and financials, as well as allocations to countries such as South Korea and China, offer international investors a broader, higher-quality tech opportunity than South Africa.
Closing takeaways
As the webinar ended, each speaker provided his biggest takeaway.
“Markets tend to climb a wall of worry,” said Kemp. “There’s always a lot of bad news swirling around, and yet markets can continue to go up.”
The anchor for investors should not be news headlines, short-term economic data, or short-term economic forecasts. It should be the valuation of individual stocks, markets, and asset classes – “because that’s really your compass for the way ahead”.
Kemp compared valuation with gravity. “You don’t always notice it. It doesn’t always impact things immediately, but over time, it acts like the slow force which brings the price of assets back to their fair value.”
Dodd said 2025 has shown that what worked in the past is not necessarily guaranteed to work in the future.
For the past decade, investors could not go wrong if they expected US markets to outperform the rest. In 2025, however, there has been strong performance from markets outside the US – particularly emerging markets. This has vindicated Morningstar’s position of the importance of globally diversified portfolios.
Disclaimer: The information in this article does not constitute investment or financial planning advice.
