South African stocks riding high

South African stocks will benefit from a broader rally in emerging markets in 2026 due to attractive valuations and strong profits, according to Momentum Investments.

The combination of improving fundamentals, expected dollar weakness and diversification flows under a Trump administration could result in “material” inflows in 2026, said Herman van Papendorp, head of asset allocation at the Johannesburg-based asset management firm, which oversees the equivalent of about R747 billion.

Foreign investors have been net sellers of South African equities through 2025, leaving the market one of the most under-owned positions within EM funds.

Van Papendorp is “cautiously confident” about the country’s economic outlook, with further rate cuts and a modest growth acceleration expected from a low base.

“An increased global allocation to EM equities could simultaneously result in material global inflows supporting South African equities,” Van Papendorp wrote in a report.

“Due to strong profit momentum, SA equities remain attractively valued against global peers and its own history.”

A weaker dollar and an improving earnings outlook will keep emerging-market equities running ahead of developed-market peers in 2026, Van Papendorp said.

Federal Reserve interest-rate cuts amid rising inflation pressures, as well as threats to the independence of the US central bank, are likely to drive the greenback weaker over the next year.

That “will likely have positive implications for emerging-market equities relative to developed market equities, as has been the case in the past,” Van Papendorp said.

“In addition, EM earnings revisions have turned positive, while EM has also become an attractive way to access the global artificial intelligence investment theme.”

Risks to the outlook for EM and South Africa include a deterioration in the global AI cycle, fewer-than-expected Fed rate cuts, a US hard landing or geopolitical flare ups.

Locally, a breakdown of South Africa’s coalition government remains the key threat, Van Papendorp said.