Investment Update

Global equity markets experienced a volatile quarter, driven by ongoing tensions in the Middle East, which kept energy prices elevated and raised concerns that inflation could remain higher for longer. Despite the volatility, the MSCI All Country World Index rose 0.9% over the quarter (in local currency terms).

Bond markets faced headwinds as higher energy prices and persistent inflation concerns prompted several central banks to raise interest rates and signal that further policy tightening may be required to return inflation to target.

Key themes over the quarter included:

Long-dated bond yields surge higher: Against the backdrop of inflation concerns and central bank rate hikes, some long-dated government bond yields surged to multi-decade highs.

In the US, 10-year and 30-year Treasury yields climbed to their highest levels since the Global Financial Crisis as investors priced in the prospect of further monetary policy tightening to contain inflation. Government bond yields in Europe saw similar moves as eurozone inflation reached its highest level since 2023.

Adding to bond market pressure was mounting US government debt, which surpassed US$40 trillion. The rise in interest rates now means that interest payments alone on this debt rank as the second-largest item in the US federal budget, behind only Social Security.

Central banks lift interest rates: Several central banks responded to inflation pressures by lifting interest rates.

The US Federal Reserve (the Fed) lifted the fed funds rate by 25 basis points, its first hike since 2023. In its Summary of Economic Projections (SEP), the Fed said it expects one more rate hike by year-end.

Elsewhere, the European Central Bank (ECB) raised interest rates and revised its inflation forecasts higher. Inflation is now projected to reach 2.5% in 2027 and 2.1% in 2028, amid elevated energy prices. In Australia, the Reserve Bank of Australia (RBA) lifted its cash rate to 4.6%, the highest level since 2011, as policymakers continue to grapple with persistent inflation.  September’s rate hike was the fourth of the year.

The quarter was marked by two interest rate hikes by the Reserve Bank of New Zealand (RBNZ). The two hikes took the Official Cash Rate (OCR) to 2.75%.

Inflation remained the central theme at both meetings, with the Committee noting that risks to the inflation outlook remained skewed to the upside given ongoing tensions in the Middle East. Nevertheless, at its September meeting, the Committee observed signs that economic activity was strengthening despite the persistence of elevated price pressures.

“Businesses are reporting stronger activity over the past couple of months. The economic recovery has resumed, and this will encourage businesses to hire more staff and invest”, the RBNZ said in its Monetary Policy Statement.

Signs that economic activity was gaining momentum were evident in the September ANZ Business Outlook Survey. Both headline business confidence and expected own activity remained at elevated levels of 52 and 48, respectively.

Other economic data released during the quarter was mixed. New Zealand’s labour market weakened, with the unemployment rate rising to 5.6%, its highest level in more than a decade. Although employment continued to increase, workforce growth outpaced job creation, resulting in a higher number of people seeking work.

Regional outcomes were mixed, with Auckland’s unemployment rate reaching 6.5%, the highest among the major centres, while Wellington recorded 4.9%. By contrast, regions with greater exposure to tourism and primary industries continued to demonstrate resilience, with Canterbury and Otago posting unemployment rates of just 3.6%.

Global equity market performance diverged over the quarter, with regional returns largely reflecting varying exposure to elevated geopolitical tensions in the Middle East and the resulting rise in energy prices.

In the US, the S&P 500 Index gained 2.3%, reaching a new record high during the quarter. The energy sector was among the strongest performers, benefiting from higher oil prices. Performance within the technology sector was more mixed, with semiconductor stocks coming under pressure, while several large-cap technology companies continued to post solid gains. As a result, the Nasdaq 100 Index rose a more modest 0.4%.

US equities were also supported by a strong second-quarter earnings season, with more than 80% of S&P 500 companies reporting earnings per share (EPS) above analyst expectations.

European markets were weaker, reflecting the region's greater dependence on imported energy and the vulnerability of key trade routes through the Strait of Hormuz. Investor sentiment was further dampened by an increase in eurozone inflation, which accelerated to 3.2% during the quarter. Against this backdrop, the Euro Stoxx 50 Index fell 0.7%, while France's CAC 40 Index declined 4.9%.

Asian markets also weakened over the quarter, reflecting both geopolitical headwinds and region-specific challenges. Japan's Nikkei 225 Index fell 4.1%, with losses amplified by weakness in semiconductor-related stocks, an area to which the index has significant exposure. In China, ongoing structural economic challenges continued to weigh on investor confidence, contributing to a 5.3% decline in the Shanghai Composite Index.

Australasian equity markets delivered modest gains over the quarter, with the NZX 50 Index and ASX 200 Index rising 1.6% and 1.3%, respectively. While the New Zealand economy continued to face inflationary pressures, business and consumer confidence remained resilient, helping to support sentiment.

At a company level, the NZX 50's largest constituent, Fisher & Paykel Healthcare (+17.9%), was among the standout performers. The stock gained strongly after the company upgraded its full-year revenue and earnings guidance. In contrast, the retirement village sector remained under pressure as higher interest rates and subdued housing market conditions weighed on earnings expectations. Ryman Healthcare (-18.1%) fell to its lowest level in more than a decade, while Summerset Group Holdings (-13.8%) also delivered a weak performance over the quarter.

Across the Tasman, Australia's equity market performance was largely driven by sector-specific factors, with the healthcare and energy sectors emerging as the strongest performers.

The healthcare sector rebounded from relatively depressed levels, supported by stronger-than-expected earnings results from companies such as Ansell, Ramsay Health Care and CSL Limited. CSL was the standout, rising more than 60% following the release of the company's results and a stronger-than-expected earnings outlook. While CSL reported a net loss of more than US$2 billion, this outcome was largely anticipated by the market. More importantly, management guided to approximately 5% growth in FY27 net profit after tax, comfortably ahead of the consensus forecast of around 2%.

Meanwhile, energy stocks benefited from higher oil prices amid ongoing geopolitical tensions in the Middle East.

Global bond markets weakened over the quarter as higher energy prices fuelled inflation concerns, driving government bond yields to multi-year and, in some cases, multi-decade highs. In the US, the 10-year Treasury yield rose to 5.28% by quarter-end, up 81 basis points over the period, while the 30-year yield finished above 5.50%.

Adding to pressure on bond markets was the continued expansion of US government debt, which exceeded US$40 trillion. With interest rates now materially higher, debt servicing costs have surged.

Government bond yields in Europe saw similar moves as the continent grappled with surging energy prices amid the closure of the Strait of Hormuz.

New Zealand bond markets faced a challenging quarter as persistent inflation pressures and expectations of higher interest rates pushed yields higher across the curve.

The quarter began with a sharp sell-off in July after inflation data surprised to the upside, reinforcing concerns that domestic price pressures were proving more persistent than anticipated. The RBNZ raised the OCR twice and reiterated its commitment to returning inflation to within its 1-3% target range.

Bond markets remained volatile through August and September, influenced by both domestic developments and moves in offshore markets. Investors continued to reassess the outlook for monetary policy, with expectations for interest rates moving higher as inflation concerns remained elevated.

Against this backdrop, New Zealand government bond yields rose significantly over the quarter. The yield on New Zealand's 10-year government bond increased by 68 basis points to 5.04%, resulting in negative returns for bond investors. The New Zealand Government Bond Index returned -2.6% over the three months to 30 September.

Listed property and infrastructure markets delivered negative returns over the quarter as rising bond yields and persistent inflation concerns weighed on investor sentiment.

The New Zealand listed property sector declined 4.0%, underperforming the broader share market. Higher government bond yields reduced the relative appeal of income-generating assets and put pressure on property valuations, particularly as investors reassessed the outlook for interest rates. The sector faced a challenging backdrop of subdued economic growth and ongoing uncertainty around the path of monetary policy.

Across the Tasman, Australian listed property fell 8.4%. The sector was similarly impacted by higher bond yields, with investors becoming more cautious towards interest rate-sensitive assets despite continued support for longer-term structural growth themes such as data centres and logistics.

International listed property (100% hedged to NZD) fell 6.7%, while international listed infrastructure (100% hedged to NZD) declined 7.0%. Rising global bond yields and a higher-for-longer interest rate outlook weighed on both sectors, offsetting the defensive characteristics that have historically supported infrastructure assets during periods of market uncertainty.