Investment Update

It was a volatile start to the year for global equities, driven largely by Donald Trump’s trade policy announcements. Several US equity markets traded to record highs during the quarter, but a weak March saw them end the quarter lower, while in Europe, share markets outperformed, with most finishing the quarter in positive territory.

Against the backdrop, the MSCI All Country World Index fell 2.5% (in local currency terms). Against the backdrop of equity market volatility, bonds finished the quarter higher, with the Barclays Global Aggregate Index (100% hedged to NZD) up 1.1%. Key themes over the quarter included:

During the quarter, Trump’s on-again, off-again approach to tariffs created heightened levels of uncertainty. Trump’s initial move was to slap a 25% tariff on imports from Canada and Mexico, and increase tariffs on goods imported from China by an additional 10%. However, during the quarter, Trump delayed, then scaled back many of the tariffs – several were done on a sector basis.

The US Federal Reserve (the Fed) left interest rates unchanged during the quarter, but made some tweaks in its Summary of Economic Projections (SEP) which largely reflected the current economic backdrop. While the Committee still sees two rate cuts this year, it revised up its inflation projections and now expects it to end the year at 2.7% versus the 2.5% it anticipated in December.

After a prolonged period of outperformance, US equities spent most of the quarter underperforming European and Asian markets. US equities faced headwinds from lofty valuations and policy uncertainty, while European markets were buoyed by German stimulus, including a pickup in defence spending. Meanwhile, China saw some advancements in the artificial intelligence (AI) space, including the release of DeepSeek’s R1 model – an AI chatbot that was developed at a fraction of the cost of its US competitors.

The Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) by 50 basis points in February, responding to a prolonged period of sluggish growth and falling inflation, which fell back inside the central bank’s target range. In its accompanying forecasts, the central bank expects the OCR to fall to about 3% by the end of the year.

Meanwhile, in economic data, the unemployment rate jumped to 5.1%, up from 4.8%, while GDP expanded by 0.7% in the final quarter of 2024, helped by primary industries, retail trade, transport and accommodation. 

Elsewhere, inflation held steady in the final quarter of 2024, with prices rising 2.2% over the 12-month period. Rental prices and rates were the largest contributors to price rises, while consumers got some reprieve with lower petrol prices.

However, there were some inflation concerns late in the quarter with the ANZ Business Outlook Survey for March showing a lift in pricing indicators. Pricing and cost expectations for businesses rose to their highest level in at least a year, while one-year-ahead inflation expectations rose to 2.6%, up from 2.5% the prior month.

On a more positive note, past activity – which can be a good indicator of GDP – rose four points.

US equities experienced a downturn in the first quarter of 2025, with the S&P 500 Index falling 4.3%. Technology shares were particularly hard hit, with the Nasdaq 100 Index dropping 10.3% due to ongoing concerns about new AI developments and their impact on the sector.

The market was also weighed down by uncertainty surrounding the Trump administration’s trade policies, which included new tariffs on imports from China, on-again, off-again tariffs on Mexico and Canada, and the threat of retaliatory tariffs on many of its trading partners. Meanwhile, economic data showed mixed signals, with inflation remaining elevated at 2.8% in February, and GDP growth estimates being revised downwards.

European equity markets showed resilience, however, with the Euro Stoxx 50 Index up a solid 7.5% and the UK’s FTSE 100 Index gaining 6.1%. Both regions benefitted from a continuation of interest rate cuts. In Asia, Japan’s Nikkei 225 Index was down 9.9% amid worries about US tariffs and their economic implications, while China’s Shanghai Composite Index fell only 0.2%.

The NZX 50 Index saw a decline of 6.4% over the quarter, underperforming many of its overseas counterparts. The market was dragged down by large caps, while mid and small cap stocks outperformed.

At an individual company level, there were 20 that ended the quarter higher. A2 Milk was up around 40%, after its results beat market expectations and as the company declared its first ever dividend. Vista Group (+21%) and Sanford Group (+19%) were the other standout performers.

In contrast, Ryman Healthcare was the biggest loser, its shares down 40% following a trading update that accompanied news of a NZ$1bn capital raise. Spark (down around 25%) was also sharply lower after it reported a 78% fall in net profits in the first half of FY25, with Heartland Group (down around 20%) another big loser.

In Australia, the ASX 200 Index fell 2.8%, impacted by global market volatility and concerns over domestic economic growth. Its falls came despite the Reserve Bank of Australia (RBA) finally beginning its rate-cutting cycle, as inflationary pressures fell back to within the central bank’s target range. The industrial and utilities sectors were the better performers, with information technology and healthcare the hardest hit.

International bond markets experienced higher levels of volatility due to policy uncertainties from the Trump administration. Proposed tariffs and fiscal policies increased inflation expectations, causing initial pressure on bonds. That’s because it raised the likelihood of interest rates being held at a higher level for longer.

However, US bond markets later found support as equity markets faced volatility from AI-related concerns. The yield on the US 10-year government bond fell 36 basis points, to 4.21%. When bond yields go down, their prices go up.

In Europe, bond markets were mixed. German government bond yields rose sharply, reflecting concerns about increased defence spending within the region being funded through an increase in bond issuance. UK bonds faced similar concerns, with yields on the equivalent government bond up 11 basis points. Japanese government bonds also saw a sustained rise in yields, given growing expectations the Bank of Japan would increase interest rates due to a pick-up in local inflationary pressures.

Central bank policy remained in focus, as the Fed kept its key interest rate unchanged. Its decision was influenced by mixed economic data, including elevated US inflation and concerns about economic growth. Other central banks, including those in Canada, Sweden and the eurozone continued to cut interest rates.

It was a similar story for New Zealand bonds, which largely took their direction from their overseas counterparts. Local bonds found some support ahead of the RBNZ’s February meeting, where it was widely expected the central bank would cut rates again. While it met expectations with its third consecutive 50 basis point cut, the RBNZ signalled it would be more cautious about the speed and size of future rate cuts. This, combined with a stronger-than-expected GDP number, suggests a more data-driven approach to monetary policy going forward. The yield on the 10-year government bond finished the quarter 8 basis points higher, at 4.49%.

New Zealand listed property was lower over the quarter, falling 4.3%, which was behind its global property peers. The weakness in the index was largely driven by a poor period for Goodman Property Trust – the index’s largest constituent. Its shares ended the quarter down about 6%.

Meanwhile, listed infrastructure was one of the better-performing sectors over the quarter, rising 4.0% (100% hedged to NZD). Its cash-flow steady characteristics made it appealing during the volatile start to the year.

In March, US equities drifted off all-time highs, largely driven by ongoing uncertainty around US trade policies and President Trump’s on-again, off-again approach to tariff announcements. Meanwhile, this policy uncertainty started to show up in consumer sentiment reports, which mostly came in on the softer side.

As we assess the outlook for the global economy, these are the key areas we’re keeping a watchful eye on.

President Trump’s trade policies have driven market direction over the past several weeks, with tariff announcements putting downward pressure on equity markets, while his announcements of delays or changes have only added to volatility.

Against this backdrop of policy uncertainty, equity market direction in the short term will be driven in part by further policy announcements – positive or negative.

Despite the recent sell-off in US equities, valuations remain stretched. Trailing and forward price-to-earnings (P/E) ratios remain above 20x, which suggests meaningful upside to US equities could be limited. Therefore, a cautious approach to positioning in US equities is warranted.

Bonds remain in a relatively tight range, with the US 10-year government bond yield spending most of March in and around the 4.25% level. On the one hand, yields have moved higher on tariff risks and fears of inflation reacceleration, while on the other hand, the possibility of slower US growth has put downward pressure on bond yields.

We currently favour lower US yields over the short to medium term as it appears US growth is slowing and the Fed is willing to cut interest rates further should inflation decelerate and/or economic data worsen. Moreover, support for US bonds comes from the administration’s policy alignment, as they prioritise a lower 10-year Treasury yield as a key indicator of economic success.