The Month Ahead

February saw mixed performances across international equity markets. Japan was particularly strong, with the Nikkei 225 Index up over 10%, supported by improving confidence, policy clarity and ongoing corporate reforms. US markets were more challenging, with the S&P 500 Index down 1% as investors reacted to AI-related disruption concerns and a US Supreme Court ruling that some of the Trump-era tariffs were unlawful.

New Zealand shares did well, with the NZX 50 Index up 4% after several companies delivered reassuring earnings updated despite softer economic data.

Meanwhile, bond markets were supported by a global flight to safety as investors navigated volatility in US equities. New Zealand bonds also gained, helped by the Reserve Bank of New Zealand’s (RBNZ’s) view that inflation is easing and monetary policy is likely to stay on hold for now.

A major development as we move into March has been the escalation in the Middle East. The US and Israel launched coordinated strikes against Iran, aimed at weakening Iran’s military capabilities and limiting its influence in the region. Iran responded with attacks on US interests and regional allies, including Israel, Qatar, Bahrain, Kuwait, Jordan, and the United Arab Emirates.

The immediate reaction (at the time of writing) has been falling equity markets, higher oil prices, and a move into traditional safe‑haven assets such as gold and the US dollar. Within equities, energy companies have been among the early beneficiaries, while airlines and travel‑related companies have come under pressure. Bond market moves have been more muted than might normally be expected.

It’s still early days, but over the coming weeks, investors are likely to focus on several key questions:

• How effective the initial strikes are seen to be, and whether they achieve their stated aims.
• How the situation evolves within Iran, including any shifts in leadership or internal stability.
• Whether the conflict broadens or becomes more prolonged, and the scale and consistency of Iran’s retaliation across the region.
• Any disruption to oil production or key shipping routes, given the region’s importance to global energy supply.

How these developments unfold is likely to play a major role in shaping market direction in the near term, with investors reacting to any signs of escalation or stability.

While geopolitics has moved to the forefront, interest‑rates and trade policy remain important drivers of market sentiment.

In the US, minutes from the US Federal Reserve’s January meeting reinforced a cautious approach. Markets still see little chance of a rate move at its 18 March meeting, and the timing of any future cuts will depend heavily on inflation and labour market data over the next few months.

Elsewhere, the Bank of England appears closest to a cut, while the European Central Bank, Bank of Japan and Bank of Canada are expected to stay on hold for now. In Australia, the Reserve Bank of Australia lifted rates to 3.85% in February and remains focused on stubborn inflation ahead of its 17 March decision.

Trade policy also continues to add uncertainty. The US Supreme Court’s decision to strike down certain tariffs has created questions about what comes next. The Trump administration has signalled replacement tariffs under different legal powers, and investors are waiting for clarity on how these will work and whether they will be temporary or extended.

Domestic economic data has been mixed. Annual inflation to December was 3.1%, slightly above the RBNZ’s target band, driven mainly by household utilities and food. Unemployment rose to 5.4% as the labour market softened, despite strong population growth.

At its 18 February meeting, the RBNZ held the OCR at 2.25% and signalled that inflation is expected to return to its 1-3% range in the March quarter and move toward the 2% midpoint over the year ahead. The bank suggested the easing cycle has likely ended, with the next move possibly being a hike in late 2026 or early 2027, depending on how growth and inflation unfold.

Looking ahead, attention will turn to the fourth‑quarter GDP release on 19 March, which will help indicate how firmly the domestic recovery is taking hold.

We have not made any major changes to our positioning, other than removing our overweight to the New Zealand dollar earlier in the year following its strong run.

Global equity valuations – especially in the US – remain elevated, limiting near-term upside. We hold a neutral position and think a balanced stance is appropriate until the outlook becomes clearer.

In bonds, we expect US long-term interest rates to stay within a relatively tight range. With central banks still assessing inflation trends, we don’t see strong reasons to meaningfully increase or decrease interest rate risk right now.

While we remain cautious overall, recent geopolitical developments may create pockets of volatility – and with that, potential opportunities. Our approach remains to stay flexible, avoid taking unnecessary risks, and be ready to adjust positioning as clearer trends emerge.