Market Commentary

Global markets drifted into year-end as the much-anticipated “Santa Claus rally” failed to materialise. 2025 still delivered robust returns overall, however, underpinned by a resilient US economy and sustained momentum in AI-related equities. These gains were achieved despite ongoing fiscal and political headwinds, including the renewed prominence of tariff rhetoric under President Trump—reviving his “TACO” moniker.

United States

US equity markets were mixed in December. The Dow Jones Industrial Average advanced 0.7%, the S&P 500 finished broadly flat, while the Nasdaq declined 0.5%. November inflation—captured during a period affected by the US government shutdown—printed at 2.7% year-on-year, while core inflation eased to 2.6%, undershooting expectations. September core PCE inflation, the Federal Reserve’s preferred measure and released in December, declined to 2.8% from 2.9% in August. October retail sales were flat, following a downward revision to September’s modest 0.1% increase.

As expected, the Federal Reserve cut rates by 25 basis points at its December meeting, citing easing labour market conditions alongside inflation that remains above its 2% target. Chair Powell’s post-meeting commentary signalled a potential pause in the easing cycle, with further cuts increasingly data dependent. Fiscal policy remains a medium-term concern, as elevated structural deficits and rising debt ratios continue to weigh on the outlook. Downside risks include a market correction, tighter credit conditions, and persistent inflation pressures. These are partially offset by AI-driven productivity gains, continued technology investment, and the potential for a recovery in household consumption.

United Kingdom

UK equities ended December strongly, with the FTSE 100 gaining 2.2%. November headline inflation eased to 3.2% year-on-year from 3.6% in October, while core inflation declined to 3.2% from 3.4%. Economic momentum is expected to remain subdued, with GDP growth forecast to slow from 1.4% in 2025 to 1.1% in 2026 as fiscal consolidation pressures household incomes and global uncertainty constrains investment.

A gradually easing monetary stance—expected to stabilise around a neutral policy rate of 3.5%—should provide some support, aided by softer food and energy prices. However, rising defence spending, persistent fiscal deficits and elevated borrowing costs suggest fiscal policy will remain constrained. Key risks include limited fiscal space, weak supply-side growth and renewed inflationary pressures.

Europe

European equity markets recorded their strongest year-on-year performance since 2021, supported by falling interest rates, German fiscal support measures, and investor rotation away from highly valued technology stocks. In December, the CAC 40 rose 0.3%, while the DAX gained a stronger 2.7%. Eurozone inflation for November held steady at 2.1%.

The ECB left policy rates unchanged in December, with monetary policy expected to remain broadly neutral as the deposit rate stabilises near 2%. Fiscal policy is also expected to be neutral at an aggregate level. Risks remain skewed to the downside, driven by escalating global trade tensions, ongoing geopolitical uncertainty and pockets of financial instability.

Asia

Asian markets were mixed. Chinese equities remained under pressure amid weak domestic demand and fragile fundamentals. The Shanghai Composite rose 2.1% in December, while the Hang Seng declined 0.9%. China’s official manufacturing PMI returned to expansion for the first time since March, rising to 50.1 in December from 49.2 in November, while the non-manufacturing PMI improved to 50.2 from 49.5.

Growth, which held near 5% in 2025, is expected to moderate to around 4.5% in 2026 as the unwind of the 2025 trade-in programme dampens consumption and the prolonged property sector correction continues to weigh on investment. Monetary policy should remain accommodative, while fiscal policy is likely to turn more expansionary through increased local bond issuance and infrastructure spending. Downside risks include trade frictions and opaque government finances, while more decisive market-access reforms could support private investment.

Japan’s Nikkei ended December marginally higher, up 0.2%. Core inflation eased to 2.9% year-on-year in November from 3.0% in October. Inflation is expected to trend toward the Bank of Japan’s 2% target, supported by moderating food prices. Policy rates are projected to rise gradually toward 1% by end-2026 as the BoJ reduces bond holdings and begins selling ETFs and REITs. Risks include weaker global trade and financial market volatility, while medium-term priorities remain rebuilding fiscal buffers, expanding labour supply, and accelerating productivity-enhancing reforms.

South Africa

Locally, the JSE extended its positive momentum for a tenth consecutive month. The ALSI rose 4.4% in December, driven largely by strength in gold and platinum prices and supported by a firmer rand. Financials led sector performance (+7.2%), followed by Resources (+5.6%) and Industrials (+1.5%), while Property declined 0.4%.

Notable outperformers included Tharisa PLC and APN (both up nearly 25%), Implats (+22%), Pan African Resources (+18.7%), Valterra (+18.4%), Thungela Resources (+18.3%), Telkom (+17.6%), and KAP Limited (+15.0%). Underperformers included Mr Price (-16.7%), Spar (-8.2%), Cell C (-8.1%), Emira Property (-5.8%), Quilter and Famous Brands (both -5.3%), BAT (-5.2%), and Pick n Pay (-4.9%).

On the macro front, headline inflation slowed to 3.5% year-on-year in November from 3.6% in October, while core inflation edged higher to 3.2%. GDP growth is expected to improve modestly from 1.2% in 2025 to 1.5% in 2026. Continued fiscal discipline, alongside faster implementation of structural reforms, remains critical to improving credit metrics, lifting growth and employment, and sustaining investor confidence amid ongoing political uncertainty.

Conclusion

Looking ahead to 2026, the global investment backdrop remains constructive but increasingly nuanced. Disinflation has progressed across most major economies, allowing central banks to pivot toward more neutral policy settings, yet policy flexibility remains constrained by elevated debt levels, fiscal pressures, and lingering inflation risks. Market leadership continues to narrow, with returns increasingly driven by structural growth themes—most notably AI and automation—alongside selective exposure to quality balance sheets and resilient cash flows.

At the same time, geopolitical uncertainty, trade tensions, and uneven global growth underscore the importance of diversification and disciplined portfolio construction. In this environment, we favour a balanced approach: maintaining exposure to long-term growth opportunities while reinforcing resilience through selective duration, high-quality credit, and defensive equity positioning.

For South Africa, sustained reform momentum and fiscal discipline remain key to unlocking higher trend growth and attracting durable capital flows. Overall, opportunity remains, but selectivity and risk management will be critical as the cycle matures.