Investment update

Global equities had a stellar second quarter, with many markets trading to record highs, shrugging off the ongoing uncertainty in the Middle East. The rally was led by the technology sector, which continued its upward momentum. Against this backdrop, the MSCI All Country World Index rose 14.7% over the quarter (in local currency terms).

Meanwhile, bond markets saw periods of volatility as investors weighed inflation worries against a possible hit to growth amid a jump in oil prices.

Key themes over the quarter included:

Middle East tensions ease, supporting recovery: The conflict in the Middle East remained a key theme, though its influence on markets diminished over time. After sparking a sharp sell-off in March and pushing oil prices above US$100 a barrel, tensions gradually eased as ceasefire negotiations gained traction. The signing of a Memorandum of Understanding and a normalisation of energy markets helped reduce fears of a prolonged inflation shock, which in turn supported the recovery in equity markets.

Inflation concerns kept policymakers cautious: Inflation also remained a theme, with the earlier surge in oil prices raising concerns that price pressures could remain elevated for longer than expected. In the US, annual inflation accelerated to 4.2% in May, the highest level in three years, although the Federal Reserve (Fed) retained a cautious approach under new Chair Kevin Warsh.

While the Fed and the UK’s Bank of England (BoE) left interest rates unchanged, both signalled they were prepared to keep monetary policy restrictive for longer. Elsewhere, the European Central Bank (ECB) and Reserve Bank of Australia (RBA) responded to persistent inflation by raising interest rates once during the quarter, while Japan’s central bank maintained its gradual shift towards higher interest rates. As a result, investors pushed back on expectations for rate cuts, which contributed to the volatility across bond markets, in particular.

Technology and AI stocks power market gains: Strong corporate earnings and continued enthusiasm around artificial intelligence were the other drivers of equity market performance. Technology stocks led gains, particularly in the US, where investors remained focused on growing investment in AI infrastructure and the earnings opportunities it presents.

The strength of the sector helped push major US share markets to record highs and was also a key contributor to the strong performance of markets such as Japan and South Korea. While technology remained the dominant theme, gains broadened later in the quarter as easing geopolitical concerns and improving risk appetite prompted investors to rotate into a wider range of sectors.

Economic conditions in New Zealand remained challenging, with the outlook shaped by persistent inflation pressures, soft growth and weak confidence indicators.

Inflation was a central focus. Annual CPI was 3.1% in the March quarter, unchanged from late 2025 and sitting just above the top of the RBNZ’s 1–3% target band. While inflation has moderated significantly from its 2022 peak, its persistence underscores the challenge facing policymakers.

Economic growth showed resilience but remained subdued overall. GDP rose 0.8% over the March quarter and 0.8% over the year, an improvement on the previous quarter but still indicative of a relatively soft expansion compared with longer-term averages.

Monetary policy developments reflected this tension. The Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 2.25% throughout the quarter, but its policy decision in May was finely balanced, requiring the Governor’s casting vote following a 3–3 split within the Committee. Importantly, the central bank signalled a clear shift towards tightening, noting that interest rates are likely to rise in order to contain inflation pressures (subsequently followed up by a 25 basis point hike in July).

Confidence indicators improved markedly at the end of the quarter. The ANZ Business Outlook headline confidence measure surged to 36.6 in June, from 10.0 in May and -10.6 in April, representing a significant recovery from the sharp deterioration seen earlier in the quarter. Firms' own activity expectations also strengthened. Nevertheless, confidence remains below the elevated levels recorded through much of 2025, and the sharp swings in sentiment highlight the uncertain environment facing businesses.

In contrast, consumer confidence remained subdued over the quarter, with the ANZ-Roy Morgan Index falling to a three-year low. It points to ongoing caution among households as cost-of-living pressures and higher interest rates constrain spending.

Finally, labour market conditions remained relatively resilient. The unemployment rate edged lower to around 5.3% in the quarter, partly reflecting a decline in participation, while employment growth remained modest.

Global equity markets delivered strong gains over the second quarter, recovering from the volatility seen in March and pushing to new highs in several regions. The rebound was supported by a combination of resilient corporate earnings, improving investor sentiment and a stabilisation in geopolitical risks, although these remained an ongoing source of uncertainty.

US equities led the advance. The S&P 500 Index rose 15.2%, while the Nasdaq 100 Index gained 21.6%, supported by continued strength in technology and AI‑related stocks. The Dow Jones Industrial Average also posted a solid increase, finishing the quarter up 12.9%. The strength in US markets reflected a robust earnings season, which reinforced confidence in the outlook for corporate profitability despite a more challenging inflation and interest rate backdrop.

European equity markets also moved higher, though performance was more mixed across the region. The Euro Stoxx 50 Index rose 15.2%, supported by improving risk sentiment and a partial easing in energy market pressures. In contrast, UK equities lagged, with the FTSE 100 Index rising just 4.0%, weighed down by softer growth momentum and a more challenging domestic political and economic backdrop.

Asian markets were among the strongest performers globally, with several indices delivering outsized gains. Japan’s Nikkei 225 Index surged 37.4%, supported by strong corporate earnings and continued investor inflows. Meanwhile, South Korea’s KOSPI Index rose 67.7%, driven by strength in semiconductor and tech-related companies.

Performance across China and Hong Kong was more subdued. The Shanghai Composite Index rose 6.0%, while Hong Kong’s Hang Seng Index underperformed, falling 6.4%, highlighting continued challenges in the region including weaker sentiment and uneven growth dynamics.

Australasian equity markets delivered more modest gains, underperforming many global peers despite taking direction from the strong rebound in offshore markets. While improving global risk sentiment provided some support, domestic factors weighed on confidence.

In New Zealand, the NZX 50 Index rose 5.5%. Business and consumer confidence remained weak, while ongoing inflation pressures continued to cloud the outlook for economic growth and monetary policy.

At a company level, performance across the market was mixed. Vista Group (+39%), Infratil (+33%) and Tourism Holdings (+33%) were the best performers. At the opposite end of the spectrum, Gentrack Group (-41%), KMD Brands (-37%) and SkyCity Entertainment Group (-21%) led the declines.

Across the Tasman, Australian equities also lagged global markets, with the ASX 200 Index rising 4.0%. While the market benefited from the broader improvement in global sentiment, gains were tempered by persistent inflation pressures and a tighter monetary policy backdrop. The RBA raised interest rates, reinforcing expectations that policy would need to remain restrictive for longer. This weighed on interest rate‑sensitive sectors and contributed to a more cautious tone.

International bond markets began the quarter under pressure as oil prices rose sharply, fuelling concerns that inflation could remain elevated, forcing central banks to keep interest rates higher for longer. As a result, government bond yields in several major markets climbed to multi-year highs. In the US, the 10-year government bond yield rose towards 4.70%, while the UK equivalent approached 5.20%.

Market sentiment improved later in the quarter following a ceasefire agreement between the US and Iran and the signing of a 14-point Memorandum of Understanding. These developments contributed to a sharp decline in oil prices, prompting bond yields to retreat from their peak levels.

Despite the pullback in yields, several central banks took action. The ECB increased its key policy rates by 25 basis points, while the RBA also raised its cash rate by 25 basis points, marking its third increase of the year. Meanwhile, the Fed left rates unchanged but adopted a more hawkish tone by removing its easing bias and raising its year-end inflation forecast to 3.3%.

By quarter-end, most major bond markets had delivered positive returns. Australia and the UK were among the strongest performers, benefiting from the sharp retracement in yields, while Japan remained the notable laggard, as its bond market continued to face challenges as the Bank of Japan raised interest rates there to their highest level in 31 years.

New Zealand bond markets were among the strongest performers over the quarter, recovering from a challenging start to the year.

The RBNZ met twice during the period and left the OCR unchanged at 2.25% on both occasions. However, the May meeting delivered a slightly hawkish surprise, with Governor Dr Anna Breman required to use her casting vote to break a 3-3 hike/hold split among committee members in favour of keeping rates on hold.

Despite the hawkish tone from the RBNZ, bond markets were supported by growing evidence that inflation pressures were contained. Oil prices fell 30% over the quarter in New Zealand dollar terms, helping to reduce concerns about imported inflation.

Meanwhile, economic data also pointed to pricing pressures being largely contained. The June ANZ Business Outlook Survey showed that inflation expectations had eased from 3.63% to 3.36%, while the monthly Selected Price Indexes (SPI) also showed no significant upward surprises.

Over the quarter, the yield on New Zealand's 10-year government bond fell 36 basis points to 4.36%, while the two-year government bond yield declined by almost 20 basis points.

The New Zealand listed property sector performed in line with the broader share market, gaining 5.0%, supported by improving global risk sentiment and a recovery in equity markets following the volatility seen in March. This occurred despite a challenging domestic backdrop, with elevated inflation, weak confidence indicators and expectations of higher interest rates continuing to weigh on the sector.

Across the Tasman, Australian listed property delivered particularly strong returns, up 13.7%, and comfortably outperforming the broader Australian share market. Strong investor demand for growth-oriented property exposures, including data centres and logistics assets, more than offset concerns around elevated inflation and further interest rate increases.

International listed property (100% hedged to NZD) also delivered strong gains, finishing the quarter with close to double-digit gains as investors rotated back into growth assets amid improving market sentiment. By contrast, international listed infrastructure generated more modest returns, with its traditionally defensive characteristics seeing it lag broader equity markets during the risk-on environment. The FTSE Global Infrastructure Index (100% hedged to NZD) rose 2.3% over the quarter.