Global Market Overview
October was a month of rotation rather than retreat. Technology shares and emerging markets fell sharply, while broader developed market indices were close to flat and bonds recovered part of their recent losses.
The MSCI ACWI returned ‑1.64% in USD for the month and the MSCI World returned ‑0.77%. The MSCI EM returned ‑8.05%, the weakest of the major indices, and the NASDAQ 100 returned ‑6.64%. The S&P 500 held up better, returning ‑0.89%, while the JPX Nikkei 400 returned ‑2.58% and the Hang Seng ‑5.21%. The FTSE 100 was the exception among the large markets, returning 2.15%. Global listed property recovered, with the S&P Global REIT Index returning 2.50%. Year to date, the MSCI ACWI has returned 11.18% in USD and the MSCI EM 13.45%.
The decline was concentrated in the companies that had led markets this year. Investors questioned the cost and financing of AI investment, and the largest technology and semiconductor companies gave back part of their gains. Because Taiwan and South Korea make up roughly half of the emerging market index, the same move weighed heavily on emerging markets. Market breadth remained narrow. The investment team had flagged this concentration as a key risk and notes that the earnings behind the AI build out remain real; the concern is how much of the market now depends on them.
Bond markets steadied after September’s sell off. The US 10 year Treasury yield traded above 5.2% for much of the month as markets continued to price further increases by the US Federal Reserve, but yields eased later in the month and most government bond markets recovered. France was the main exception: political difficulty over its budget kept French bond yields under pressure relative to Germany.
The Middle East remained the main external source of pressure. Brent crude traded above $100 a barrel early in the month and rose further in the second half after attacks on energy infrastructure in Saudi Arabia. The investment team’s focus stayed on refined products, particularly diesel, where tight supply continues to feed inflation more directly than crude oil. The stronger US Dollar and expectations of further tightening weighed on precious metals, and gold and platinum fell during the month.
South African Market Overview
South African equities were broadly flat, while bonds and listed property delivered solid gains.
The FTSE/JSE All Share Index returned ‑0.39% in ZAR for October, taking its year to date return to ‑3.60%. Weaker gold and platinum prices weighed on mining shares, while higher oil prices and global risk aversion limited the broader market. The FTSE/JSE SA Listed Property Index returned 1.98% (year to date: 5.47%). The FTSE/JSE All Bond Index returned 2.13% (year to date: 5.74%), the strongest domestic asset class for the month, and cash, measured by the STeFI Composite, returned 0.59% (year to date: 5.74%).
The Rand weakened against the firmer US Dollar, although it held up well relative to most other emerging market currencies. For South African investors this cushioned offshore returns: measured in Rand, the MSCI ACWI returned 0.23% for the month.
Local bonds rallied after the Medium Term Budget Policy Statement on 21 October. Treasury lowered its estimate of this year’s deficit to 3.7% of GDP, still expects debt to GDP to ease over time, and announced temporary fuel levy relief from November. It also cut its 2026 growth forecast to 1.2%. The weaker element was the fiscal anchor: rather than a numerical debt rule, Treasury proposed a framework of published fiscal plans, which research presented to the committee viewed as a missed opportunity. Inflation rose to 4.5% in September, driven by fuel, while core inflation eased to 4.0%. With the repo rate at 7.25%, the investment team expects the South African Reserve Bank to hold or tighten further rather than cut while energy costs keep inflation above target.
The investment team regards South African equities as inexpensive on forward earnings, with banks offering high dividend yields, but it sees limited reason to add exposure yet. Foreign investors have continued to sell, rates have not yet peaked and fuel costs are squeezing household spending. The team’s view is that the local market is unlikely to deliver positive returns if global or emerging market equities weaken. The local government elections on 4 November are on the watch list. The team expects the vote itself to be largely priced; coalition building in the metros over the following weeks matters more.
Key Insights from Weekly Investment Team Meetings
- The cost of capital remains the central theme. The committee’s tactical review in mid October concluded that rising government debt, energy driven inflation, central banks that are still tightening and debt funded AI investment all compete for capital. Cash and bonds now offer real alternatives to equities. The committee places the greatest weight on this base case, and more weight on a negative outcome than on a positive one.
- South African equities are inexpensive, but the team is waiting for clearer catalysts. Valuations are low, but foreign selling, high interest rates and fuel costs weigh on the outlook. The team wants to see selling ease, rates peak and earnings grow before adding exposure. For now, the underweight is held in local cash rather than moved offshore.
- Bonds offer value, but cannot be relied on to hedge equities. The team favours the shorter end of the South African bond curve, where yields price more tightening than it expects. Offshore, it has been building US Treasury exposure gradually as yields moved above 5.2%. Because energy and supply constraints keep inflation risks high, bonds and equities can fall together, so commodities and real assets remain part of the strategic mix.
- AI earnings are real, but market concentration is a risk. A small group of companies carries the US index. The team favours active managers over passive index exposure and has added downside protection to part of its US equity exposure.
- Research presented to the committee set out the main route to a better outcome. Our global analyst partners argued that the rise in US yields is a cyclical overshoot, that underlying inflation is closer to 2% than headline figures suggest, and that markets are mid cycle rather than late cycle. The committee treats this, together with a resolution in the Middle East, as the path to its more positive scenario, but it did not change its central view.
- What happens after the elections matters more than election day. The US midterm elections on 3 November and South Africa’s local government elections on 4 November both fall just after month end. The team’s assessment is that the outcomes are broadly priced, and that the policy and coalition decisions that follow are the bigger source of risk.
Portfolio Implementation and Strategy
The committee held its tactical asset allocation review on 15 and 16 October, using scenario analysis across a base, bull and bear case. The resulting house view, approved after the review, confirmed a defensive stance. Portfolios moved towards it during the second half of the month. The positioning below applies specifically to the investment team’s funds. Model portfolio allocations can differ, because the underlying managers in those portfolios hold their own views.
Local (ZAR based) funds. In local funds, managed within Regulation 28 limits, SA equity is meaningfully below neutral, moved lower in line with the committee’s view that the local market is inexpensive but lacks a catalyst. The All Share was close to flat in October, so this position had little effect. SA money market is significantly above neutral; with the repo rate at 7.25%, cash offers a positive real return with low volatility and holds the funds’ defensive reserve. SA bonds are modestly below neutral across both long and short dated bonds, and some bond exposure was moved into cash late in the month. As the All Bond Index rallied, this position detracted modestly. SA and global listed property together are below neutral, which detracted slightly as both recovered. Within the offshore allocation, developed market equities are modestly above neutral, a smaller overweight than in recent months, and the team added US equity exposure with downside protection late in the month. Emerging market equities are marginally above neutral, which detracted slightly as the asset class fell. Commodities are close to neutral, with a preference for energy over metals, which helped as precious metals fell. Overall, the offshore allocation is modestly above neutral.
Global funds. Measured against a global neutral, developed market equities are significantly below neutral in the global funds, held mainly through active managers rather than the index. Exposure was increased slightly late in the month but remains well below neutral, which limited the effect of the fall in technology shares. Global short dated bonds are significantly above neutral. Global long dated bonds are now also significantly above neutral, after the team built this position from close to zero as US yields rose above 5.2%; this contributed positively as bonds recovered in October. Global cash is modestly above neutral, lower than in September as cash was used to fund the bond purchases. Global listed property and infrastructure remain significantly below neutral, which detracted as the asset class recovered. Spot commodities are modestly below neutral, with energy preferred over metals. Developed market equities are above neutral in the local funds and below neutral in the global funds. This reflects the different neutral weights of the two fund types.
October reinforced the team’s preference for diversification over prediction. Portfolios hold equity exposure where earnings are visible, substantial cash and bond holdings that pay investors to wait, and protection where concentration risk is highest. Positioning reflects the committee’s probability weighted view, which leans towards caution while the cost of capital keeps rising. It is not a forecast of market direction.
Source of all data: Morningstar, unless otherwise stated.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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