Investment Update

Global equity markets experienced significant volatility this quarter, beginning with a sharp sell-off triggered by US President Donald Trump’s “Liberation Day” tariff announcement which surprised investors with its unexpectedly aggressive scale. However, markets rebounded in the following weeks as the administration adopted a more conciliatory tone, with several indices reaching record highs by the end of the quarter.

Bond markets also fluctuated, supported by concerns over slowing economic growth but faced headwinds around worries of a reacceleration of inflation.

Key themes over the quarter included:

US trade policy sparks turbulence: In April, the US administration introduced sweeping tariffs, starting with a flat 10% tax on all imports and additional levies targeting specific countries. 

China was one of the hardest hit countries, with its additional tax lifting the effective tariff on imported goods to 54%, while Trump imposed a 20% tax on goods from the European Union (EU).

These measures unsettled markets early in the quarter. However, the administration later paused many of the tariffs to pursue bilateral trade agreements. 

US-Iran tensions escalate: On 21 June, the US launched targeted strikes on Iranian nuclear facilities in Fordow, Isfahan, and Natanz, aiming to disrupt uranium enrichment activities.

Oil prices spiked to their highest levels of the year but quickly retreated following a ceasefire agreement between Iran and Israel.

Fed leaves rates unchanged: The US Federal Reserve (the Fed) left interest rates unchanged at its May and June meetings. In June, the Summary of Economic Projections (SEP) indicated a more cautious outlook, citing slower growth and rising inflation risks, partly due to the impact of tariffs.

The Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) twice during the quarter, taking it to 3.25%. In a surprising move, one member of the Committee voted to leave interest rates unchanged at the May meeting, which meant the decision went to a vote, which resulted in a 5-1 ruling to cut the OCR. 

The RBNZ updated its forecasts for various indicators, which included a downward revision to its Q2 GDP growth rate to 0.3%. Additionally, it expects the OCR to be around 3% by the end of 2025. 

Meanwhile, there was some strong Q1 GDP data, which showed the economy grew 0.8%, exceeding most forecasts. Strong performances in manufacturing, business services, and mining helped lift overall output, though the arts and recreation sector contracted. 

Elsewhere, inflation concerns returned over the quarter, largely driven by rising food prices, which rose 0.8% in April, then 0.5% in May, which took the annual pace of food price inflation to 4.4%. 

All told, the stronger the expected GDP data, and upside risks to inflation, saw interest rate markets scale back the likelihood of a July cut.  

Although there were signs the economy was starting to turn a corner, the housing market remained benign. The median New Zealand house price fell 0.9% in the 12 months to May 2025, while at a regional level, Auckland house prices were down 3.5%. However, there was a pickup in activity, with sales rising 8.9% on an annual basis.

“The stability in interest rates has encouraged more buyers to enter the market, though levels of confidence vary by region. While some areas are experiencing consistent conditions, certain cities are still navigating changes in affordability and demand trends”, the REINZ said in its press release. 

Finally, the New Zealand Coalition Government released its 2025 Budget. The Budget introduced a new rule allowing businesses to write off 20% of the value of new asset purchases, which aims to boost domestic growth.

The second quarter of 2025 was defined by sharp swings in global equity markets, with volatility driven by renewed trade tensions, mixed economic data, and shifting central bank signals. At one point, major indices such as the Nasdaq 100 Index and S&P 500 Index were down nearly 20% from their highs, before staging a powerful rebound.

US equity markets recovered strongly, led by technology stocks, as cooling inflation and resilient employment data helped restore investor confidence. The Nasdaq 100 Index and the S&P 500 Index both surged back to record highs. The rally was supported by AI-related investment flows and optimism around rate cuts later this year, despite ongoing uncertainty around tariffs. These indices finished the quarter up 18.0% and 10.9% respectively.

European equities also rebounded, with the UK’s FTSE 100 Index hitting a new high and Germany’s DAX Index gaining on bullish outlook for the country's fiscal expansion offset fears of economic pressure from global trade tensions. The European Central Bank maintained a dovish stance, helping anchor sentiment amid subdued inflation.

In Asia, Japan’s Nikkei 225 Index rose steadily, supported by optimism around a potential US–Japan trade agreement and a broader risk-on sentiment in global markets and finished 13.9% higher. Chinese equities remained range-bound, as authorities pledged support to offset US tariffs and reaffirmed growth targets.

Australasian markets mirrored global trends, although the NZX 50 Index posted a more modest gain of 2.7% over the quarter. While domestic data was mixed—annual inflation held steady, and unemployment remained unchanged—investors welcomed signs of stability. The Reserve Bank’s commentary remained cautious, flagging geopolitical risks but reaffirming the resilience of New Zealand’s financial system.

Company performance was broadly positive, with Tourism Holdings Limited (+27.1%) one of the better performers after it received a non-binding takeover proposal, while Fonterra (+17.7%) also performed well on the back of strong dairy prices.  

In Australia, the ASX 200 Index reached a record high on its way to a 9.5% gain, buoyed by a rate cut from the Reserve Bank of Australia (RBA) and strength in rate-sensitive sectors.

Global bond markets were volatile this quarter, shaped by diverging central bank signals and fiscal concerns. The yield on the US 10-year government bond rose sharply early in the period following a US credit rating downgrade and strong consumer data, before easing as inflation moderated. The Federal Reserve held rates steady but maintained a data-dependent stance, leaving markets uncertain about the timing of future policy shifts. The yield on the 10-year bond finished the quarter only 2 basis point higher at 4.23%, having at one point reached a high of 4.60%.

European bond markets were more stable however, with modest yield increases reflecting cautious optimism. The European Central Bank’s dovish tone which saw it instigate two separate 25 basis points cuts, and subdued inflation, helped anchor investor expectations. The yield on the German 10-year government bond fell almost 13 basis points over the quarter. When yields fall, bond prices go up.

New Zealand fixed interest markets followed global patterns. Bond prices declined early in the quarter before recovering later, supported by a global flight to safety. By the end of the quarter, the yield on the New Zealand 10-year government bond was 5 basis points higher at 4.54%.

New Zealand listed property continued to perform well, with the index posting a 7.3% return over the quarter. Investor sentiment was buoyed by stable interest rates and strong earnings updates. Global listed infrastructure also delivered positive returns, with the hedged index rising over the quarter.

Coming off a volatile first quarter, which saw US equity markets drop close to 20% before closing higher, we are at an inflection point. Momentum in US equities has continued to build, but valuations are once again looking stretched.

Investor sentiment has turned more optimistic, supported by easing geopolitical tensions and resilient corporate earnings, but risks remain. 

As we look forward, key areas of focus include:

As we enter July, trade policy remains a key market focus. Recent developments suggest a partial resolution may be in sight. President Trump announced that a framework trade deal with China has been signed.

However, tensions remain with other trading partners. Talks with the European Union have stalled, and the US has threatened to impose tariffs of up to 50% on EU imports if no agreement was reached by the July 9 deadline. In response, the EU is preparing retaliatory tariffs targeting US agricultural and energy exports. This raises the risk of a broader trade conflict, which could weigh on global growth and investor sentiment.

While markets have so far taken these developments in stride, the potential for renewed trade frictions remains a key risk to monitor in the weeks ahead.

Short-term indicators continue to support US equities, with earnings surprises and resilient economic data providing a tailwind. However, we remain cautious over the medium term. Valuations are elevated, and signs of slowing growth are beginning to emerge—particularly in housing and consumer spending.

We continue to see value in US government bonds. Even though they had a tough run in May, we believe they could help protect portfolios if the economy slows down.

US bonds should offer a steady return that’s adjusted for inflation, which makes them a good option for more conservative investors. With interest rates still high and signs of economic weakness starting to show—like a cooling housing market and softer job numbers—bonds can act as a cushion if markets get rocky later this year.

Domestic data remains mixed. The unemployment rate held steady, but forward indicators suggest some softening in the labour market. Consumer spending has moderated following a pre-tariff surge, while food price inflation remains a near-term concern. The RBNZ’s recent meeting was more hawkish than expected, with markets now reassessing the likelihood of a rate cut in the near term. We remain neutral on both New Zealand equities and bonds, awaiting clearer signals on the growth and inflation outlook.