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.
Two prices dominated the third quarter: the price of money and the price of energy. Long dated government bond yields rose across the developed world. Japan and Europe led the move and the United States followed, with the 10-year Treasury yield above 5.2% by quarter end. Central banks leaned towards tighter policy. The US Federal Reserve raised rates in September, and markets began to price further increases. In South Africa, the Reserve Bank held the repo rate in July and then raised it to 7.25% in September.
Energy was the second driver. Tension in the Middle East flared in July and again in early September. The pressure point shifted from crude oil to refined products such as diesel. Refinery capacity was stretched, refining margins widened sharply and global oil inventories fell to low levels. Weather and supply risks to agriculture added to the picture. The result was a broad commodity rally, with the Bloomberg Commodity Index returning 16.19% in USD, the strongest outcome of any asset classes this quarter.
Equity markets were driven by earnings rather than rates for most of the period, but leadership was narrow and changed often. Technology shares sold off in July, recovered in August and led again in September, while broader markets found rising yields harder to ignore. Developed market equities returned 1.88% in USD and emerging markets returned −0.37%. In South Africa, a strong August for resource shares was reversed in September, leaving the FTSE/JSE All Share Index at −0.27% in ZAR. Listed property and bonds, locally and globally, declined. Cash delivered steady positive returns.
Q3 2026 Asset Class Performance Summary
| Asset Class (Index) | Q3 Return ZAR | Q3 Return USD | Positioning | Performance |
| SA Equity (FTSE/JSE All Share TR) | −0.27% | −0.31% | Underweight | Neutral Performance |
| SA Listed Property (FTSE/JSE SA Listed Property TR) | −1.14% | −1.18% | Neutral | Underperformed |
| SA All Bond (FTSE/JSE All Bond TR) | −0.68% | −0.72% | Neutral | Neutral Performance |
| SA Cash (STeFI Composite) | +1.72% | +1.68% | Overweight | Neutral Performance |
| Global Equity (MSCI ACWI NR) | +1.64% | +1.60% | Neutral | Neutral Performance |
| DM Equity (MSCI World NR) | +1.92% | +1.88% | Overweight | Outperformed |
| EM Equity (MSCI EM NR) | −0.34% | −0.37% | Underweight | Neutral Performance |
| Global Property (S&P Global REIT TR) | −5.76% | −5.80% | Underweight | Underperformed |
| Global Bonds (GinsGlobal Global Bond Index) | −2.31% | −2.35% | Neutral | Underperformed |
| Global Cash (OMG Money Market USD) | +0.89% | +0.85% | Overweight | Neutral Performance |
| Commodities (Bloomberg Commodity TR) | +16.23% | +16.19% | Neutral | Outperformed |
Total Return, Quarter End | Source: Morningstar
Positioning: Overweight / Neutral / Underweight indicates the MitonOptimal asset allocation view.
Performance: Outperformed / Neutral Performance / Underperformed indicates the asset class performance over the quarter.
These are the investment team’s tactical views on a 12 month horizon, reviewed quarterly, and may differ from long term strategic allocations.
Global Market Overview
A TURN IN THE BOND MARKET
The quarter extended what is now a broad sell off in government bonds. Japanese yields continued to climb despite two rounds of currency intervention. French, German and UK yields broke higher, and US yields followed. Research presented to the committee attributed most of the rise in US yields to higher real yields and firmer growth rather than to rising inflation compensation. That matters, because it points to a cyclical overshoot rather than a loss of confidence in government finances, although fiscal deficits remain large across the major economies.
Monetary policy turned tighter. The Federal Reserve raised its policy rate in September, and by quarter end markets were pricing several further increases over the next year. The European Central Bank continued to tighten into a weak economy. Bonds and equities have tended to move in the same direction for some time, which reduces the protection government bonds traditionally offer in a balanced portfolio. Global bonds returned −2.35% in USD for the quarter.
ENERGY, INFLATION AND SUPPLY
Inflation pressure this quarter came mostly from supply rather than demand. Refining capacity was reduced by damage to facilities in Russia and the Middle East and by closures elsewhere. US refineries ran close to full capacity. Diesel, which moves almost everything that is grown, mined or built, became markedly more expensive than crude oil. Shipping costs rose as vessels avoided choke points. Higher interest rates do little to fix shortages of this kind, which is why central banks find the current mix difficult.
Agriculture added a further layer. Disruption to Black Sea grain exports, pressure on fertiliser supply and the onset of a strong El Niño all pointed to tighter food markets. Europe enters winter with low gas storage, so a mild winter would help considerably.
CURRENCIES
The US Dollar weakened in August and strengthened again in September as rate expectations rose. Japan intervened twice to support the Yen. The Rand weakened after the Reserve Bank’s July decision, strengthened through August and weakened again in September. Over the full quarter it ended close to where it started, which is why the ZAR and USD returns in the table above are almost identical.
EQUITY LEADERSHIP
July brought a sharp reversal in the momentum trade. Highly priced technology and semiconductor shares, and leveraged products linked to them, sold off, while value and quality styles outperformed. The NASDAQ 100 returned −6.59% in USD for July before recovering 4.22% in August and 3.28% in September. The S&P 500 returned 2.22% in USD for the quarter. Earnings remained the main support, with US companies continuing to report strong profit growth. Emerging markets fell 3.07% in July as Korean semiconductor shares sold off, recovered in August and eased in September. Global listed property returned −5.80% in USD as higher yields weighed on the sector.
Looking ahead, the US midterm elections on 3 November are a live source of volatility. Research presented to the committee suggests fiscal deficits stay large under every likely outcome, and that trade and foreign policy risks are unlikely to depend on the result.
South African Market Overview
POLICY AND INFLATION
The Reserve Bank surprised markets in July by holding the repo rate at 7.00% in a split vote, and the Rand weakened on the day. With oil prices rising again and inflation expectations drifting higher, the Monetary Policy Committee raised the repo rate unanimously by 25 basis points to 7.25% on 23 September. The Bank lifted its average inflation forecast for 2026 to 4.4% from 4.0%, expects inflation to rise above 5% towards the end of this year and to return towards 3% by the end of 2027. It also cut its 2026 growth forecast to 1.2% from 1.4%. Services inflation and inflation expectations are now the Bank’s main concern.
GROWTH AND CONFIDENCE
Domestic activity remained subdued. Business confidence slipped to 38 in the third quarter, below its long term average of 40, and the manufacturing PMI fell to 45.8 in August, signalling contraction. Household spending is under pressure from borrowing and living costs. There were brighter spots. Electricity supply has been stable, new vehicle sales were up 12.6% for the year to August, and the extension of the US trade preference programme to the end of 2028 provides some certainty for exporters, even though South Africa still faces a 12.5% US import tariff. Local government elections in November are the main domestic political event ahead.
MARKETS
The FTSE/JSE All Share Index returned 1.18% in ZAR in July and 4.65% in August, when resource shares rallied with gold and platinum prices. September reversed most of those gains, with a decline of 5.82% as a firmer Dollar and higher global yields weighed on precious metals and resource shares. The index ended the quarter at −0.27% in ZAR and is −3.22% for the year to date. South African equities lagged developed markets because the local market is heavily exposed to commodity prices that turned in September, while companies dependent on the domestic economy continue to struggle for growth. Valuations are undemanding relative to history.
The FTSE/JSE All Bond Index returned −0.68% in ZAR, a modest loss compared with developed market bonds, helped by high real yields and steady local demand. Listed property returned −1.14%, giving back a strong July in August. Cash, at 1.72%, was the best performing domestic asset class.
SA EQUITY
Positioning: Underweight | Performance: Neutral Performance
South African equities returned −0.27% in ZAR for the quarter, with a wide range of monthly outcomes. Resource shares drove a strong August and then gave back most of that gain in September as metal prices fell on a stronger Dollar and higher global yields. Companies exposed to the local consumer remained under pressure throughout.
Portfolios were underweight South African equities for the quarter. The team reduced the size of the underweight during August as resource shares recovered and the market’s low valuation became harder to ignore. Over the full quarter the underweight had little effect on relative outcomes, because the asset class ended close to flat. It limited exposure to the September decline but meant portfolios captured less of the August rally.
SA LISTED PROPERTY
Positioning: Neutral | Performance: Outperformed | +10.03% ZAR / +14.91% USD
SA listed property was the standout domestic performer, returning +10.03% in ZAR for Q2 2026. The asset class delivered this outcome despite the SARB raising the repo rate by 25 basis points to 7.00% during the quarter — a move that had been well flagged and broadly priced into markets before the announcement. Recovering investor appetite for income-generating assets and the moderation of energy-driven inflation fears following the ceasefire were the primary drivers. Portfolios maintained a neutral position in SA listed property during the quarter. The strong outperformance of the asset class meant that a more constructive positioning would have added incremental value. The team acknowledged the improving property outlook during the period but maintained a neutral stance given the residual uncertainty in the early part of the quarter.
SA FIXED INTEREST
Positioning: Neutral | Performance: Neutral | +7.87% ZAR / +12.66% USD
South African bonds returned +7.87% in ZAR for Q2 2026. Notably, this positive return was delivered in a quarter during which the SARB raised the repo rate by 25 basis points to 7.00% at its 28 May MPC meeting — the first rate hike since May 2023. The market’s constructive response reflected that the move was broadly anticipated and priced in well ahead of the announcement. Core inflation remained contained at 3.8%, which provided reassurance that the tightening cycle was measured and data-dependent rather than aggressive. The yield curve remained broadly stable throughout the period, providing consistent carry. Portfolio positioning in SA fixed interest was neutral. The asset class served its stabilising function effectively, contributing positively to total returns and providing a meaningful buffer against equity market volatility.
SA CASH
Positioning: Overweight | Performance: Neutral Performance
Cash, as measured by the STeFI Composite, returned 1.72% in ZAR, the best result among domestic asset classes and slightly higher after the September rate increase.
Portfolios were overweight cash throughout the quarter. This reflected the team’s view that the balance of risks did not justify a larger commitment to risk assets, and the value of holding liquid reserves ahead of US and local elections. In this quarter the overweight added stability, and it leaves room to add to other asset classes if prices become more attractive.
GLOBAL EQUITIES
Positioning: Neutral | Performance: Neutral Performance
Global equities, as measured by the MSCI ACWI, returned 1.60% in USD. The quarter was one of rotation rather than direction. July saw a sharp reversal in the most crowded technology and momentum positions, August brought a broad recovery, and September favoured large US technology companies over the rest of the market.
Positioning in global equity was neutral overall, combining an overweight in developed markets with an underweight in emerging markets. The team continued to blend index exposure with active managers across value, quality, growth and momentum styles. This blend helped in July, when the momentum unwind hit concentrated portfolios hardest, and limited the effect of narrow leadership elsewhere in the quarter.
GLOBAL PROPERTY
Positioning: Underweight | Performance: Underperformed
Global listed property, as measured by the S&P Global REIT Index, returned −5.80% in USD, the weakest result of the quarter. The sector gained in July but fell 3.00% in August and 5.35% in September as bond yields rose.
Portfolios were underweight global property, alongside listed infrastructure, which the team trimmed further as momentum weakened. This positioning contributed positively to relative outcomes. The team continues to see rising yields and redemption pressures in some unlisted property funds as reasons for caution.
GLOBAL FIXED INTEREST
Positioning: Neutral | Performance: Underperformed
Global bonds returned −2.35% in USD. The quarter extended a bear market in developed market government bonds, with yields rising in Japan, Europe, the UK and the US. The US 10 year yield ended the quarter above 5.2%.
Positioning in global bonds was neutral. For most of the quarter the team favoured short dated bonds over long dated bonds, which limited losses. From late August the team began to add longer dated US Treasuries in small steps, on the view that yields above 5% offer reasonable compensation and that duration may again protect portfolios if growth slows. These additions were made into a falling market and have so far cost some return. The team expects to continue building gradually rather than in a single step.
GLOBAL CASH
Positioning: Overweight | Performance: Neutral Performance
Global cash, as measured by the OMG Money Market USD, returned 0.85% in USD. With the Rand ending the quarter close to where it started, the ZAR return of 0.89% was almost the same.
Portfolios held an overweight in global cash and short dated instruments. This provided stability in a quarter of falling bond prices and preserved the flexibility to add to equities, bonds or commodities at better prices. The cost of this position was modest, as short term US rates remain attractive.
DEVELOPED MARKET EQUITIES
Positioning: Overweight | Performance: Outperformed
Developed market equities, as measured by the MSCI World, returned 1.88% in USD, ahead of most other asset classes. US companies continued to report strong earnings growth, which offset the pressure from higher bond yields. The S&P 500 returned 2.22% in USD.
Portfolios were overweight developed market equities, and this contributed positively to relative outcomes. During August the team used weakness to add to US equities, including broader equal weighted exposure that reduces reliance on the largest technology companies. The committee remains alert to concentration in a small number of large companies and to the effect of rising financing costs on the technology investment cycle.
EMERGING MARKET EQUITIES
Positioning: Underweight | Performance: Neutral Performance
Emerging market equities returned −0.37% in USD. The asset class fell 3.07% in July as Korean semiconductor shares sold off, recovered 3.37% in August and eased in September. Valuations remain well below developed markets, and earnings growth expectations are strong in parts of Asia.
Portfolios were underweight emerging markets in aggregate, reflecting research caution on concentration in a few large semiconductor companies and the effect of a stronger Dollar. The team made selective additions after the July sell off. With the asset class ending close to flat, the underweight had a small effect on relative outcomes. The committee sees a stronger case for emerging markets over a longer horizon and expects to build exposure gradually.
COMMODITIES
Positioning: Neutral | Performance: Outperformed
Commodities, as measured by the Bloomberg Commodity Index, returned 16.19% in USD, the strongest result of any asset class. The rally was broad. Energy rose on refined product shortages and Middle East risk. Agricultural prices moved higher on Black Sea disruption, fertiliser constraints and weather risk. Copper and zinc were supported by tight supply and demand from electrification and data centres. Gold and platinum rallied strongly in August but weakened in September as the Dollar and real yields rose.
Portfolios held a neutral position in commodities, having moved up from below neutral early in the quarter and added to gold in August. A neutral stance meant portfolios participated in the rally but did not capture all of it, and this was the main opportunity cost of the quarter. The committee views commodities as an increasingly important diversifier and source of return, while recognising that their volatility calls for measured position sizes.
Positioning into the fourth quarter reflects a wide range of possible outcomes rather than a single forecast. US and South African elections in November, the path of US interest rates and developments in the Middle East could each move markets materially, so the team has kept portfolios diversified and avoided large directional bets.
Risk is held intentionally in developed market equities, where earnings remain strong, with an emphasis on broad and equal weighted exposure rather than concentration in a few large companies. Commodities are held at neutral as a diversifier against supply driven inflation. The team is gradually adding longer dated US Treasuries, on the view that current yields offer reasonable value if growth slows, while accepting that yields could rise further in the near term.
Risk is avoided in global and listed property, where higher yields remain a headwind, and the team remains underweight South African and emerging market equities, although both screen as attractively valued over a longer horizon. Cash and short dated instruments, locally and offshore, remain above neutral. This provides protection and the liquidity to act if the elections or rate decisions create better entry points.
The balance between opportunity and protection is therefore tilted slightly towards protection, while keeping enough exposure to participate if markets continue to rise. The team will review positioning in mid October and again after the November elections.
WEIGHTINGS GOING INTO Q4 2026
The actual weightings are relative to each portfolio’s long term neutral weighting, and the actual weighting varies between risk profiles and mandates.
| Asset Class | Underweight | Neutral | Overweight |
| SA Equity | ● | ||
| SA Property | ● | ||
| SA Fixed Interest | ● | ||
| SA Cash | ● | ||
| Global Equity | ● | ||
| Global Property | ● | ||
| Global Fixed Interest | ● | ||
| Global Cash | ● | ||
| Commodities | ● |
- Overweight / Neutral / Underweight indicates the MitonOptimal asset allocation views
- Outperformed / Neutral / Underperformed indicates the asset class performance over the quarter
CLOSING SUMMARY
The third quarter confirmed that the investment environment has changed. Government bonds no longer reliably cushion equity losses, inflation is being driven by physical supply constraints that interest rates cannot easily fix, and market leadership shifts quickly between a small number of themes.
For portfolios, the quarter rewarded diversification and patience. The overweight in developed market equities and the underweights in global property contributed positively, cash added stability, and the neutral stance in South African bonds and property kept losses small. The main opportunity cost came from commodities, where a neutral position captured only part of a strong rally, and from early additions to long dated bonds as yields kept rising.
The investment team enters the final quarter of the year with a balanced, slightly cautious stance, liquidity in reserve and a clear view of the events that matter. Positioning reflects the balance of probabilities and will be adjusted as the facts change.
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.