Africa-Press – South-Africa. An outperformance from the United States economy in 2026 would have significant implications for South Africa, in the form of a stronger dollar and weaker rand.
This scenario could also threaten to derail the rally in South African government bonds, which have seen their yield decline and prices rise in 2025. This has reduced the cost of borrowing for the government and in the local economy.
A knock-on effect of a weaker rand and the end of the bond rally is the likelihood of a pause in interest rate cuts from the Reserve Bank.
This is feedback from Symmetry’s chief investment strategist, Izak Odendaal, who outlined the implications of a ‘hot’ US economy in a recent research note.
Odendaal explained that a hot economy is typically good for equities and bad for bonds as long-term yields rise, pushing bond prices down.
However, there is a tipping point where bond yields can put pressure on equity valuations even as profit growth is strong.
Valuations in the US markets are already stretched, and therefore vulnerable to higher inflation and interest rates, Odendaal said. This makes the potential impact far more severe.
Given the outsized influence of the US economy and financial markets on global developments, such a scenario will have implications for South Africa.
For South Africa, Odendaal explained that a ‘too hot’ scenario implies a stronger dollar and weaker rand, creating a headache for the Reserve Bank and investors.
A weaker rand makes it more expensive to import goods into South Africa, pushing inflation upwards. This has the potential to push the Reserve Bank to pause interest rate cuts.
It could also threaten the rally in South African bonds, which have had one of their best years on record in 2025, pushing down the cost of borrowing for the government.
The threat to South Africa does not only come in the form of a ‘too hot’ scenario, but also from the potential for the US economy to enter a recession.
A “too cold” outcome invokes the adage that the world catches a cold when the US sneezes. A sharp economic growth slowdown in the US could lead to weakness on global markets as money tends to rush to the US in search of a safe haven.
However, the resultant Fed cuts should ultimately pull the dollar down and possibly move the gold price up.
In other words, South African investors should hope that the US economy in 2026 is neither too hot nor too cold. Where things stand today, however, it seems likely that we remain in Goldilocks territory.
However, this year’s fantastic returns won’t necessarily repeat, and there are bound to be surprises next year.
AI boom or bust
The outsized influence of US financial markets also poses another threat to South Africa, most notably from the potential bursting of the artificial intelligence (AI) bubble.
American technology giants, particularly the Magnificent 7 of Apple, Google, Microsoft, Meta, Amazon, Nvidia, and Tesla, have seen their valuations soar in recent years since the launch of ChatGPT in November 2022.
This has made the fortunes of global stock markets increasingly tied to this handful of companies, which now make up 35% of the S&P 500 index.
With American equities making up over 60% of global market capitalisation, this means the world is increasingly exposed to the performance of these companies.
While these companies may seem far removed from the South African economy and financial system, the old saying that no events are unconnected in markets rings true.
This was emphasised by the Reserve Bank in its latest Financial Stability Review, which outlined how the increased concentration of global markets poses a threat to South Africa.
The Reserve Bank noted that a sharp decline in the value of the Magnificent 7 could trigger a tightening in global financial conditions as risk aversion rises.
“Historically, such episodes have been unfavourable for emerging markets, leading to portfolio outflows, weaker exchange rates, and higher risk premia,” it said.
South Africa is particularly vulnerable to these external shocks, given the country’s stagnant economy, high government debt burden, and the fact that it is a very open economy.
“For South Africa, these spillovers could amplify domestic market volatility and weigh on asset prices, particularly in the equity, fixed-income and currency markets,” the Reserve Bank said.
The United States plays an outsized role in global financial markets due to it having the largest economy and the world’s deepest capital markets.
This is the reason why the Reserve Bank, for example, watches the movements of the US Federal Reserve so closely when making its own decisions.
With regard to investing, the United States’ equity markets have sucked up global liquidity over the past 15 years due to its relentless economic growth, innovation, and deep capital markets.
While this picture may be changing slightly as investors look elsewhere for safety, the American equity market remains dominant, and its tech giants command trillions of dollars in market cap.
For investors searching for returns or to participate in the AI boom, it is hard to look beyond the United States and its technology giants.
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