Market review

International equities had a strong final quarter of the year, with most major share markets delivering solid returns, capping off another stellar year for equity markets. AI optimism continued, but did fade late in the quarter, while improvements on the inflation front also boosted sentiment.

Global equity markets closed the year on a strong note, though performance varied by region. US stocks posted modest gains, with the S&P 500 Index and Nasdaq 100 Index each up 2.7%, as investors grew cautious about stretched valuations among AI-driven companies. Meanwhile, Japanese share markets were the strongest performers, with the Nikkei 225 Index up 12.2%, benefiting from a weaker yen, ongoing corporate reforms, and improved business outlook following the election of Sanae Takaichi as the new prime minister.

European markets also delivered standout returns, supported by positive news on the inflation front. The FTSE 100 Index rose 6.9%, and the Euro Stoxx 50 Index gained 5.0%. An easing of political tensions further supported investor confidence across the region.

Bond markets were more mixed. US bonds delivered modest gains over the quarter, supported by two rate cuts from the Federal Reserve (the Fed). With inflation moderating and the job market cooling, expectations are for more rate cuts in 2026, which could further support bonds.

European bond markets were more mixed. German government bonds weakened as the European Central Bank (ECB) kept interest rates steady, signalling it may be at the end of the easing cycle, while UK bonds were some of the strongest-performing bond markets after a surprise drop in inflation saw the Bank of England (BoE) cut interest rates and expectations are for more in the coming months.

New Zealand equities posted modest gains over the quarter, with the NZX 50 Index up 1.9%, bringing its annual return to 3.3%, well behind most of its global peers. Persistent economic headwinds tempered sentiment despite broad-based gains, as 36 of 50 index constituents finished higher.

That said, economic data began to improve over the quarter. Third quarter GDP grew 1.1%, with gains across 14 of 16 industries, while, business confidence continued to rise, with a significant jump in December. The ANZ Business Confidence Index surged to a 30-year high, suggesting firms are feeling more upbeat about the year ahead.

The Reserve Bank of New Zealand (RBNZ) lowered the Official Cash Rate (OCR) twice during the quarter, bringing it to 2.25%. Despite the interest rate cuts, New Zealand bond markets fell after the central bank signalled that November’s cut may mark the end of the current easing cycle.

Across the Tasman, Australian equities were some of the weakest performing over the quarter, with the ASX 200 Index falling 1.0%. Its weakness was largely due to a stronger-than-expected inflation reading, which erased hopes of near-term rate cuts.

Get the latest insights and commentary on different aspects of investing and KiwiSaver from our team of experts.