The playing field has changed – the rules haven’t

Sport is full of reminders that the game can change. Purists may wince, but when T20 arrived, cricket was rewired: batters took more risk, earlier, and the sixes followed. Anyone still batting like it was a Test match looked out of step. Yet the teams that won weren't the ones that swung at everything. They were the ones that adapted to the new format while still doing what wins matches regardless of the format, protecting their wickets and keeping the scoreboard moving.

Markets are at a similar junction. The game appears to have changed, and the temptation is to swing at whatever the index offers. The need to defend, however, has not gone away.

Positioning shows just how far the balance has tipped. US households now hold a record share of their financial assets in equities,¹ while the S&P 500’s price-to-earnings ratio, adjusted for the economic cycle, is approaching dot-com territory.² Technology accounts for close to 40% of the S&P 500, while defensive sectors such as consumer staples, health care and utilities have shrunk to a record-low weight of around 15%.³ Investors have collectively traded diversification for momentum, and defence for the assumption that the good times will keep rolling.

Much of this shift wasn’t an active decision. Index funds are weighted by market capitalisation, so as a company rises, trackers are forced to buy more of it, and winners keep getting bigger. The result is that many investors are more concentrated than they realise, with a portfolio that is effectively one big bet on the last three years repeating, leaving very little left to cushion a fall. Extremes can persist for much longer than anyone expects. When everyone is positioned for ‘this goes on forever’, though, the downside tends to be far less forgiving.

The next wave of mega-caps could add to this. SpaceX listed in June at US$1.77 trillion, the largest IPO on record. Anthropic has set a price range for its Nasdaq listing, with trading expected to start before the end of November. OpenAI, which has filed confidentially, is likely to follow next year, so the Magnificent 7 could soon become the Magnificent 10. Index providers have also shortened the gap between listing and inclusion, in some cases to a matter of days, so tracker funds may be forced to buy before the market has settled on a fair price.⁴

However, the first day is a poor guide to future performance. Jay Ritter, a professor of finance at the University of Florida, studied IPO performance for four decades. His research⁵ shows an average first-day gain of 18.9%, yet investors who bought at the close of day one trailed the broad US market by 20.5% over roughly three years.

The lesson from IPO history is not to avoid these companies. It is to be selective about which ones you own and how much you pay for them.

In this momentum-driven market, the investment styles designed to defend have had a harder time. Head of Quality, Clyde Rossouw, explores why quality has been out of favour for longer than at any point since the dot-com era, and why a portfolio of durable franchises that compound earnings still plays a role, particularly as ballast when markets turn rough. Quality is rarely the fastest scorer, but it is what keeps the innings intact when conditions change.

The labels we use to organise portfolios are blurring too. Fiscal restraint, orthodox monetary policy, improving institutional credibility and relatively well-behaved inflation are now increasingly the preserve of emerging markets (EMs), while developed economies, Europe above all, are exposed to the energy and supply shocks once pinned on EMs. If the old divide describes risk less well than it used to, allocating by that label alone is a little like batting for the old format.

That does not make EM equities any less relevant. After years of headwinds, the case for emerging market equities is turning. Historically, three things have helped the asset class work: a dollar downcycle, an earnings inflection and cheap valuations. In our view, these conditions are arguably lining up, and with improving company fundamentals, a wide valuation gap to the US and strong domestic growth drivers, the backdrop looks attractive for investors.

It is easy to assume South African investors already have emerging market exposure by default, given how much we channel into the home market. In practice, the SA and EM universes look very different. Resources and banks make up more than half of the FTSE/JSE All-Share Index,⁶ while more than a third of the MSCI Emerging Markets Index is in technology.⁷ Simply tracking the EM index can mean missing much of the asset class’s breadth. That is why portfolio managers Varun Laijawalla and Archie Hart make the case for an actively managed allocation as a different stream of alpha, with ideas in South Korea, Latin America and the AI supply chain that SA investors cannot easily access at home.

The best T20 sides didn’t throw out the basics of the game. They learned to play them in a faster format. Investors face the same test. The leaders of the past few years may well keep running, but the market is more concentrated and the old labels less reliable than many investors assume. That calls for a sound defence and a wider range of options.

Thank you for your continued support.

Siobhan Simpson
Head of SA Retail

¹ Federal Reserve Q2 2026.
² S&P 500 Shiller CAPE Ratio, October 2026.
³ Schwab Center for Financial Research, S&P Dow Jones Indices, as of 30 September 2026.
⁴ Trillion dollar IPOs and the new Magnificent 10, Ninety One, October 2026.
⁵ Initial Public Offerings: Updated Long-run Statistics, October 2026.
⁶ FTSE/JSE All Share Index factsheet, August 2026 (Basic Resources 33%; Banks 20%).
⁷ MSCI Emerging Markets Index (USD) factsheet, August 2026.