After three consecutive years of strong returns, financial advisers and investors are facing a difficult question: where do opportunities lie once markets have delivered well above-average performance?
Since 2023, equities across most major regions have posted robust gains, supported by easing inflation, resilient economic growth, and strong performance from a narrow group of large technology-linked companies. At the same time, valuations in parts of the global market – particularly at index level in the United States – have become more stretched, while investor optimism has increased.
For South African financial advisers, these dynamics have been complicated by a sharply stronger rand over the past year. Although positive from a domestic economic perspective, the currency move has reduced the rand-based returns of offshore assets, even as local bonds and selected equity sectors performed strongly.
These developments formed the backdrop to a webinar hosted by Morningstar Investment Management South Africa this week. Senior members of the firm’s global and local investment teams discussed how they are interpreting market conditions and positioning portfolios in 2026. The speakers focused on valuation, selectivity, and portfolio construction rather than on forecasting specific market outcomes.
Elevated optimism and behavioural risk
The past three years have rewarded investors who remained invested despite repeated macro-economic concerns, including inflation scares, interest-rate volatility, and geopolitical tension. According to Mike Coop, chief investment officer for Morningstar Investment Management’s Europe, Middle East and Africa region, this period illustrated the difficulty of consistently adding value through tactical market timing.
Coop cautioned that strong recent performance tends to narrow opportunity sets. When valuations rise and optimism becomes widespread, markets can become more sensitive to news flow, increasing the risk of behavioural overreaction. In such an environment, he said, discipline around decision-making becomes increasingly important.
Rather than anchoring portfolio decisions to a single expected outcome, Morningstar’s approach emphasises considering a range of scenarios and building portfolios intended to function across different economic conditions. This process-led approach prioritises diversification over prediction.
Looking beyond headline US valuations
The webinar addressed the limitation of relying on headline valuation measures at index level. At a broad market level, US equities appear expensive relative to historical norms, prompting questions about whether exposure should be reduced.
Coop said Morningstar’s response is to examine markets below index level. The firm’s investment process breaks markets down into sectors, styles, and individual companies, comparing current prices with internal estimates of fair value.
From this perspective, some areas of the US market were described as having underperformed relative to fundamentals. Healthcare was cited as an example of a sector that lagged broader equity markets in the previous year, partly because of concerns around regulatory policy and political uncertainty. Coop said Morningstar viewed this reaction as excessive relative to the sector’s underlying characteristics, including stable demand, and long-term structural drivers.
Smaller US companies were also discussed. Coop said Morningstar does not view the small-cap universe as uniformly attractive. Instead, the focus is on smaller companies with durable competitive advantages, which Morningstar’s equity research team considers to be trading at discounts to estimated fair value. He noted that these businesses often differ materially from the broader small-cap category in terms of balance-sheet strength and earnings resilience.
Communication services were mentioned as another area where company-level analysis was considered important, particularly in distinguishing between firms whose earnings prospects are linked to ongoing investment in digital infrastructure and those whose valuations already reflect optimistic assumptions.
Emerging markets: selectivity over generalisation
Sean Neethling, head of investments for South Africa at Morningstar Investment Management, said global capital flows in recent years have been heavily concentrated in the US, leaving many other regions comparatively overlooked. While some reallocation away from the US became apparent during 2025, he described this as an early and uneven process rather than a fully established trend.
From a valuation perspective, Neethling said emerging markets as a group appear cheaper than developed markets, with earnings growth expectations not fully reflected in prices. However, this does not apply uniformly. Some regions, including parts of Asia such as India and Taiwan, were described as relatively fully priced.
By contrast, Morningstar highlighted selective areas within the broader emerging-market universe. South Korea was discussed as offering exposure to global demand for semiconductors and AI-related manufacturing, while Latin America, including Brazil and Mexico, was cited for a combination of commodity-linked earnings and comparatively low valuation multiples.
Neethling noted said many global investors have regarded China as effectively uninvestable in recent years following regulatory interventions and weaker growth. Morningstar’s assessment, he said, was that this sentiment resulted in large discounts in parts of the market, particularly among certain consumer and technology companies. Although some of that valuation gap has narrowed, he said the firm continues to view China as an area requiring selectivity rather than broad exposure.
South Africa: currency and offshore exposure
Currency movements have been a defining feature of recent returns for South African investors. The rand strengthened significantly against the US dollar in 2025, reducing the rand-based performance of offshore assets while supporting domestic purchasing power.
Neethling pointed out that the rand’s move over the past year had been unusually pronounced, shifting from levels near R19 to the dollar to below R16 at points during 2025. He described this as a move from what Morningstar had previously viewed as an “extreme” valuation towards levels that, on long-term purchasing-power measures, remain discounted, albeit less so than before. Such moves tend to occur quickly and are difficult to time, reinforcing the firm’s reluctance to base portfolio decisions on short-term currency expectations.
Morningstar entered 2025 with a relatively modest offshore allocation in its Regulation 28-compliant portfolios. Neethling said this reflected valuation considerations and the availability of opportunities in local assets at the time, rather than a specific currency forecast. As the rand strengthened and local assets performed well, this positioning coincided with relative performance differences within the peer group.
Looking ahead, he said Morningstar continues to assess the rand using long-term purchasing-power measures, while recognising that recent strength may alter the relative attractiveness of offshore opportunities over time.
SA equities: concentration and selectivity
Neethling noted that local equity performance in 2025 was driven by a relatively narrow segment of the market, particularly large resource companies and precious-metal producers, as higher commodity prices supported earnings. Within resources, he said returns were largely driven by single-commodity exposures – especially gold and platinum producers – rather than by diversified mining companies, contributing to unusually narrow market leadership.
Banks were also cited as contributors later in the year, supported by strong capital adequacy and liquidity positions. However, Neethling cautioned that strength in selected large stocks should not be confused with broad-based market recovery. Outside these areas, performance across industrial and mid-cap shares remained more closely tied to domestic economic conditions.
From Morningstar’s perspective, this concentration presents challenges for portfolio construction. Resource stocks, he said, have performed strongly, but valuations in parts of the sector now reflect more optimistic assumptions. At the same time, domestically focused companies remain sensitive to the pace of economic reform and improvements in infrastructure delivery.
Neethling described the outlook for South African equities as improving at the margin, citing developments such as South Africa’s exit from the grey list and recent credit-rating actions. However, further progress would depend on the implementation of reforms and evidence of sustained economic momentum, rather than on market sentiment alone.
Fixed income as return driver and diversifier
Over the past two years, South African government bonds delivered what Neethling described as “equity-like” real returns, supported by declining inflation and high starting yields.
Morningstar’s portfolios maintained an overweight position in local government bonds over this period, largely funded from cash. In discussing local bonds, Neethling said the unusually strong returns reflected a combination of high starting yields and falling inflation. He added that, on a hold-to-maturity basis, real returns available today are lower than those achieved recently but remain positive by historical standards. The emphasis, he said, was less on repeating past performance and more on the role bonds continue to play in providing income and diversification within portfolios.
Neethling said a significant portion of recent returns from local-currency emerging-market bonds reflected currency appreciation as the US dollar weakened. While acknowledging that part of this effect has already occurred, he said yields in several emerging markets remain elevated relative to developed markets, warranting ongoing analysis.
Process over prediction
A consistent message throughout the webinar was the importance of process in an uncertain environment. Coop said large-scale shifts between asset classes tend to add value only infrequently, typically during periods of extreme mispricing. Outside of such conditions, Morningstar’s preference is to adjust exposures within asset classes rather than attempt wholesale reallocations.
Neethling added that advisers should focus on ensuring clients are invested in mandates aligned with their risk tolerance and objectives, rather than responding to short-term market movements. In his view, the principal risk for investors is abandoning a suitable strategy during periods of uncertainty.
Disclaimer: The information in this article does not constitute investment or financial planning advice.
