QUARTERLY MARKET INSIGHTS | Q1 2026

At MitonOptimal we take asset allocation (AA) very seriously, taking into consideration both Strategic AA (3-7 years) and Tactical AA within the various asset classes. This quarterly piece provides insight into our short term tactical calls on a 12-month view (reviewed quarterly) and as such may diverge from our long term strategic AA views. We review our strategic AA bi-annually as we believe this is prudent practice, in a world dominated by debt de-leveraging, central bank and political interference.

Source: Morningstar in ZAR

What really mattered in Q1 2026 was not what happened in equity markets — it was what happened in commodities and in geopolitics. The quarter began constructively, with global risk appetite broadening beyond US large-cap growth. That tone was sharply interrupted in March when an outbreak of conflict in the Middle East sent oil prices surging above $100 per barrel, reversed the disinflationary trend that had supported markets through January and February, and triggered a significant repricing across equities, bonds and currencies. The result was a quarter defined by divergence: early strength, a violent mid-quarter reversal, and a commodity complex that proved to be the only reliable source of meaningfully positive returns.

Global Market Overview

The first two months of Q1 2026 built on the broadening theme that had emerged in late 2025. Global markets began 2026 with a noticeably broader risk-on tone. The MSCI World rose 2.24% and the MSCI ACWI gained 2.96% for January, but the strongest impulse came from outside the traditional developed-market core: the MSCI Emerging Markets surged 8.85% and the MSCI ACWI ex-USA returned 5.98%. January looked more like a rotation month than a simple continuation of US exceptionalism. February delivered a more nuanced picture, with leadership continuing to broaden beyond the traditional US large-cap growth complex. While the MSCI World was broadly flat at 0.73% in USD, and the S&P 500 and Nasdaq 100 declined by 0.79% and 2.28% respectively, other regions and styles offered stronger returns. The MSCI Emerging Markets Index gained 5.50% in USD over the month, while the FTSE 100 advanced 4.87% and Japan’s JPX-Nikkei Index 400 rose 9.68%.

March brought an abrupt and significant regime change. The outbreak of conflict in the Middle East delivered a sharp supply shock that sent oil prices soaring above $100 per barrel and jolted global markets. US economic momentum softened further as the conflict weighed on sentiment and activity. The economy had already begun to lose traction, with Q4 2025 GDP growth slowing sharply to +0.7% annualised from +4.4% in Q3. Growth expectations for Q2 2026 were revised down meaningfully, with consensus pointing to sub-0.5% quarter-on-quarter growth. The Federal Reserve maintained a cautious, data-dependent stance at its March meeting, leaving the federal funds rate unchanged at 3.50%–3.75%, with forward guidance shifting modestly more hawkishly — the median rate path now pointing to a single cut in 2026, down from two previously. In the UK, the FTSE 100 retraced part of its early-year gains in March, dragged down by cyclical and consumer-exposed stocks. Ten-year Gilt yields climbed toward multi-year highs, rising 68 basis points over the month, as investors recalibrated the balance between persistent inflation and fragile growth.

On balance, the quarter confirmed that concentrated US equity leadership faces sustained structural headwinds. Commodities — particularly energy — emerged as the dominant return driver and inflation hedge of the period.

South African Market Overview

South Africa’s quarter was a tale of two halves, with a powerful March reversal undoing much of the gains built through January and February. South African assets delivered a solid start to 2026, supported by easing inflation dynamics, a firmer Rand and a commodity-backed bid for cyclicals. The FTSE/JSE All Share returned 3.72% for January, the All Bond Index gained 1.95%, SA Listed Property added 0.98%, and cash returned 0.57%. February proved even stronger, with the FTSE/JSE All Share returning 7.01% in ZAR for the month and 10.99% year to date, while SA Listed Property gained 6.29% for the month. Bonds delivered a positive return of 1.74% in ZAR. The February backdrop was supported by a more credible domestic fiscal narrative, moderating inflation and a stable monetary policy stance.

March reversed these gains sharply. Risk-off sentiment sparked broad equity sell-offs, making March the JSE’s worst month since 2008. The All-Share Index plunged 11.2% in March. Resource stocks were especially hard hit as precious metals prices collapsed — a dramatic reversal from February’s rally. By end-March, gold was down 11.5% and platinum down 17.5% month-on-month. The Rand depreciated sharply, with USD/ZAR spiking to R17.24 per USD at one point before settling around R16.94, approximately 6% weaker than end-February. The SARB’s Monetary Policy Committee kept the repo rate unchanged at 6.75% during its March meeting. Governor Lesetja Kganyago underscored a “cautious” approach amid heightened global uncertainties. Policymakers acknowledged improved domestic fundamentals — Q4 2025 GDP growth surprised to +1.1% for full-year 2025 and the National Budget signalled a “fiscal turning point” — but warned that a prolonged conflict could derail growth and ignite second-round inflation pressures. The local bond market saw increased volatility, with the 10-year yield spiking 119 basis points higher over the month.

SA EQUITY

Positioning: Neutral | Performance: Neutral | -0.61% ZAR/ +3.79% USD
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The neutral positioning in SA equity was appropriate given the volatile and ultimately negative quarter for the index. The resource-driven rally through January and February was meaningful, with precious metals and commodity-linked counters providing strong leadership. However, March’s sharp reversal in gold and platinum miners — driven by the Middle East conflict and a flight to the US Dollar — erased those gains decisively. A neutral stance ensured portfolios participated in the early upside while limiting the incremental downside risk that would have accompanied an overweight. The outcome was broadly in line with benchmark, which reflects a measured and balanced approach to a domestic market that remains structurally credible but cyclically volatile.

SA LISTED PROPERTY

Positioning: Neutral | Performance: Underperform | -4.92% ZAR / -7.97% USD

SA listed property underperformed the broader local market over the quarter. The sector benefitted from the improving inflation narrative and investor re-rating activity in February but gave back those gains in March as bond yields spiked sharply and risk appetite deteriorated. The sharp rise in the local 10-year yield weighed heavily on rate-sensitive property valuations. The neutral positioning meant portfolios were exposed to the full extent of the sector’s underperformance. While the sector’s structural headwinds remain unresolved, the February recovery demonstrated that property retains cyclical sensitivity to improving domestic conditions — a dynamic that will warrant continued monitoring.

SA FIXED INTEREST

Positioning: Neutral | Performance: Underperform | -3.36% ZAR / -6.45% USD

SA bonds delivered positive returns through January and February, supported by the improving domestic inflation and fiscal narrative. March erased those gains and more. The bond market saw increased volatility, with the local 10-year yield spiking 119 basis points higher, reflecting investor concerns about inflation and potential delays to monetary easing. The neutral positioning in SA fixed interest meant portfolios absorbed the full impact of March’s repricing. The sharp yield move was driven by an external geopolitical shock rather than a deterioration in domestic fundamentals — a distinction that reinforces the case for maintaining measured duration exposure in an uncertain global environment.

SA CASH

Positioning: Underweight | Performance: Neutral | +1.66% ZAR / -1.59% USD

Cash was the only local asset class to deliver a positive ZAR return for the quarter. The underweight stance reflected a considered preference for deployed capital across risk assets during a period of improving domestic fundamentals — a positioning that was broadly rewarded through January and February. The March reversal and the resilience of cash returns during the risk-off episode highlighted the optionality cost of the underweight. The quarter serves as a reminder of the liquidity value that cash preserves during periods of sharp volatility.

GLOBAL EQUITIES

Positioning: Overweight | Performance: Neutral | 0% ZAR / -3.20% USD

The overweight in global equity reflected the investment team’s conviction in broadening global participation beyond the US. January’s leadership from Asian and UK markets reinforced the theme that capital flows were increasingly willing to back non-US opportunity sets where valuations are less demanding and the macro narrative is improving at the margin. Emerging markets, in particular, outperformed meaningfully through January and February. The sharp March selloff compressed full-quarter USD returns to negative territory, but the ZAR return was approximately flat — assisted by Rand depreciation. The neutral performance outcome against an overweight positioning reflects the severity of the March reversal rather than a flaw in the underlying thesis.

GLOBAL PROPERTY

Positioning: Underweight | Performance: Outperform | +4.39% ZAR / +1.05% USD

Global listed property was one of the few asset classes to deliver a positive USD return for Q1, rebounding strongly through February. The underweight positioning meant portfolios did not fully participate in this recovery. The outperform outcome relative to the underweight stance reflects a positioning miss for the quarter — one that will be assessed in the context of the team’s ongoing view on structural headwinds in the global listed property space and the rate sensitivity of the asset class.

GLOBAL FIXED INTEREST

Positioning: Underweight | Performance: Neutral | +1.32% ZAR / -1.92% USD​

Global bonds provided modest positive returns in ZAR terms, largely reflecting Rand depreciation rather than USD outperformance. In USD terms, returns were negative as rising oil prices and geopolitical uncertainty pressured sovereign bond markets globally. The underweight stance reflected a considered view on duration risk in a world of elevated and uncertain inflation — a view that proved broadly appropriate as global yields remained volatile. The neutral performance outcome for this underweight confirms that not carrying excess duration into a geopolitical shock was a prudent approach.

GLOBAL CASH

Positioning: Neutral | Performance: Outperform | +4.18% ZAR / +0.85% USD​

Global USD cash outperformed its neutral weighting over the quarter. The ZAR return was materially enhanced by Rand weakness — particularly the sharp depreciation experienced in March — which amplified the ZAR value of offshore cash holdings. The neutral positioning ensured portfolios retained a meaningful allocation to this stabilising component, which proved its worth during March’s risk-off episode. The outperform outcome underscores how currency dynamics can generate meaningful differentiation in ZAR-denominated portfolios, even when USD returns are modest.

GLOBAL CASH

Positioning: Overweight | Performance: Outperform | +28.52% ZAR / +24.41% USD​

Commodities were the standout performer of Q1 2026 by an exceptionally wide margin. The overweight positioning in commodities was the most impactful allocation decision of the period. The outbreak of conflict in the Middle East delivered a sharp supply shock that sent oil prices surging above $100 per barrel. Energy led the commodity complex higher in March, while precious metals — which had been a strong tailwind through January and February — reversed sharply as the gold price fell and safe-haven flows consolidated in the US Dollar. Despite the intra-quarter rotation within commodities, the overweight allocation delivered significant positive contribution to portfolio outcomes, providing meaningful diversification against the sharp losses experienced across equities, local bonds and listed property.

PORTFOLIO PERFORMANCE SUMMARY

The investment team’s positioning throughout Q1 2026 demonstrated both strategic conviction and tactical discipline, with the most significant actions concentrated in March as the geopolitical environment shifted rapidly.

Entering the quarter, the team was already carrying a meaningful underweight in US equity relative to the global equity neutral, while non-US developed market equity and emerging market equity were both held modestly above neutral. Commodities were already held above neutral, reflecting the team’s longstanding conviction that the narrow US leadership trade was stretched and that capital rotation toward non-US opportunities and real assets represented the more attractive risk-adjusted opportunity set. The investment team’s guiding sentiment heading into the market stress of March was captured succinctly: “More scared to be in, less scared to be out.” This proved to be a timely frame.

As the Middle East conflict escalated in early March, the team moved quickly and decisively. Initial trades added direct gold exposure, reduced technology and emerging market value positions, and cut back on broad US equity and non-US international equity. The proceeds were rotated into short-duration instruments, reducing overall risk and extending the liquidity buffer within the offshore portfolio.

By mid-March, further risk reduction was implemented across multiple asset classes. Global bond duration was reduced, with the team rotating into shorter-duration instruments and adding inflation-linked exposure. Global equity was further reduced. Global real estate was trimmed. Infrastructure exposure was increased modestly, reflecting a preference for real-asset diversification with lower correlation to risk assets. In local portfolios, SA equity risk was further reduced, spot commodity exposure was increased, and a small global energy position was added.

At month-end, the team’s posture reflected the genuine two-sided uncertainty the new regime had created. The team assessed that emerging market assets were broadly overbought prior to the Middle East conflict and that the latest selloff had not yet pushed them into deeply oversold territory. Together with heightened geopolitical risk and the lingering energy shock, this warranted a cautious near-term stance. The team’s view, informed by third-party research, was that the macro backdrop was more favourable than during prior oil shocks — real rates were positive, inflation expectations remained anchored, growth was stable, and labour markets were soft enough to limit wage pass-through. If the initial inflation spike were to turn into a growth shock, the Federal Reserve would have room to cut, and emerging market central banks, having front-loaded their tightening cycles, would have even more flexibility to ease.

Taken together, the quarter demonstrated active and responsive portfolio management: structured pre-positioning in real assets and non-US equity ahead of the shock, followed by rapid and disciplined risk reduction as the macro regime changed. The rotation into short-duration fixed income, the reduction of global equity, the trimming of emerging market and growth exposures, and the increase in commodity and energy positioning all reflected a coherent and consistent response to a fast-moving environment — one that balanced near-term capital preservation with the maintenance of exposure to long-duration structural themes.

CLOSING SUMMARY

Q1 2026 was defined by a single macro event — the outbreak of conflict in the Middle East — that interrupted a constructive start to the year and repriced most asset classes sharply in March. The quarter reinforced several enduring portfolio construction principles.

First, commodities remain a credible and powerful hedge in a world of geopolitical fragmentation and supply constraints. The overweight delivered when it mattered most. Second, regional diversification within global equity continued to reward patience — even though March compressed full-quarter returns, the underlying broadening of global leadership beyond the US remains structurally valid. Third, the sharp repricing in SA bonds and listed property confirmed that domestic credibility improvements, however real, remain vulnerable to external shocks that are beyond local policy control.

The quarter challenged the assumption that a benign inflation trajectory would persist uninterrupted. It confirmed that diversification — across asset classes, geographies and return drivers — is the most reliable risk management tool available to multi-asset portfolios.

• Overweight / Neutral / Underweight indicates the MitonOptimal asset allocation views
• Outperformed / Neutral / Underperformed indicates the asset class performance over the quarter

Source of all data: Morningstar.  Unless otherwise stated all local data is in ZAR and all offshore data is in USD.

Jacques de Kock

Quantitative Analyst & Portfolio Manager

The content of this article is for information purposes only and does not constitute an offer or invitation to any person. The opinions expressed are subject to change and are not to be interpreted as investment advice. You should consult an adviser who will be able to provide appropriate advice that is based on your specific needs and circumstances. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable and given in good faith, but no representation is made as to their accuracy, completeness or correctness. MitonOptimal South Africa (Pty) Limited is an Authorised Financial Services Provider Licence No. 28160, regulated by the Financial Sector Conduct Authority (FSCA) – Registration No. 2005/032750/07.MitonOptimal Portfolio Management (Pty) Limited is an Authorised Financial Services Provider Licence No. 734, regulated by the FSCA – Registration No. 2000/000717/07.