Investment Update

Global equities closed the year higher despite a volatile final quarter. Europe and Japan led gains, while US markets lagged as AI-driven enthusiasm cooled.

Meanwhile, bond markets were mixed. US bonds delivered gains after the US Federal Reserve (the Fed) cut interest rates, while cooling inflation in the UK propelled bonds there. Japan was the outlier, with bonds there coming under pressure as long-dated yields rose to multi-decade highs.

Key themes over the quarter included:

The Fed capped 2025 with two rate cuts over the final quarter, each by 25 basis points. The December cut was contentious – three members dissented, with two favouring no change and one advocating a deeper 50 basis point cut. The Fed also announced plans to buy short-dated government bonds to manage liquidity.

In its updated Summary of Economic Projections, the Fed signalled one more cut in 2026 and forecast inflation – the Personal Consumption Expenditures (PCE) Index – easing from 2.9% to 2.4% by year-end.

Inflation data was a key indicator during the quarter, and for the most part, the situation improved in Europe and the US. In the UK, annual inflation dropped to 3.2%, down from 3.6%. The drop was larger than expected and its slowest pace since March, prompting the Bank of England (BoE) to cut its key interest rate to 3.75%. Meanwhile, eurozone inflation remained stable at 2.1%.

Meanwhile, annual CPI in the US dropped to 2.7%, while core inflation was at 2.6%. Shelter inflation, which makes up about one-third of the CPI basket, continued to slow, indicating good progress is being made to drop headline inflation back to the Fed’s 2% target rate.

After a 43-day government shutdown, newly released data points to a weakening labour market. The Bureau of Labor Statistics reported a loss of 105,000 jobs in October, followed by a modest gain of just 64,000 in November. The unemployment rate climbed to 4.6%, its highest level in four years, signalling a clear slowdown in hiring momentum.

The broader U-6 unemployment rate, which includes discouraged workers and those working part-time for economic reasons, rose to 8.7% in November, up from 8.0%.

The Reserve Bank of New Zealand (RBNZ) lowered the Official Cash Rate (OCR) twice during the quarter, bringing it to 2.25%. In its November meeting, which included a 25 basis point cut, policymakers noted that inflation pressures are easing, even as headline CPI remains near the top of the target band.

“Annual headline CPI inflation increased due to higher tradables inflation along with high inflation in household energy costs and local council rates. As these dissipate, this will support headline CPI inflation returning to near the 2 percent mid-point of the target range in mid-2026”, the RBNZ said in its policy statement.

The central bank signalled that November’s cut may mark the end of the current easing cycle and projected that the unemployment rate (5.3%) has likely peaked.

Economic data reinforced optimism. Q3 GDP grew 1.1%, with gains across 14 of 16 industries. Manufacturing rebounded 2.2% after a sharp Q2 slump, while construction rose 1.7%, though annual construction output remains down 8.5%.

Information media and telecommunications was the largest negative contributor over the quarter, down 2.1%.

Elsewhere, business confidence continued to rise over the quarter, with a big jump in December. The ANZ Business Confidence Index surged to a 30-year high, suggesting firms are feeling more upbeat about the year ahead.

Global equity markets closed the year on a positive 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 names.

Healthcare led sector gains, while real estate and utilities lagged.

Europe delivered standout returns. Cooling inflation boosted sentiment, which saw the FTSE 100 Index surge 6.9%, France’s CAC 40 Index add 3.6%, and the Euro Stoxx 50 Index climb 5.0%, marking record highs for several benchmarks.

Meanwhile, Japan’s Nikkei 225 Index continued its stellar run, ending the quarter with double-digit gains, taking its 12-month return to 28.7%.

New Zealand equities posted modest gains in Q4, 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.

Top performers included Sky City Entertainment (+36.4%), rebounding after an August sell-off; Sanford (+35.1%), buoyed by strong earnings; and Oceania Healthcare (+33.3%), which benefited from the RBNZ rate cuts.

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.

Global bond markets were mixed over the quarter as investors weighed the outlook for interest rate policy heading into 2026. In the US, bonds eked out small gains as the Fed cut interest rates. However, the meeting was not without its controversy, with two members favouring no change and one pushing for a bigger 50 basis point cut. The yield on the 10-year government bond closed the quarter at 4.17%.

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.

In contrast, Japanese bonds faced heavy selling as long-dated yields hit multi-decade highs, driven by fiscal concerns as debt levels continue to rise.

New Zealand bonds weakened over the quarter, despite two interest rate cuts from the RBNZ.

The 10-year government bond yield initially dropped to its lowest level since 2023, but after the central bank signalled that the December rate cut will likely be the last of this cycle, bond yields reversed higher, dragging bond prices lower.

By the end of the quarter, the yield on the 10-year government bond was 21 basis points higher at 4.40%. 

The New Zealand listed property sector struggled over the quarter, falling 3.8% as the rise in government bond yields weighed heavily on the interest-rate-sensitive section. 

At a company level, six of the 10 companies in the index delivered negative returns, with Vital Healthcare Property (-9.3%) and Precinct Properties NZ (-7.8%) two of the weakest performing.

Meanwhile, listed infrastructure delivered muted returns with the FTSE Global Infrastructure (100% NZD Hedged) Index up 0.5% over the quarter.