Investment Update

Global equity markets continued their strong run over the quarter, with many indices reaching record highs. The rally was driven by resilient corporate earnings, AI-led momentum, and growing expectations of interest rate cuts. Against this backdrop, the MSCI All Country World Index gained 7.6% in local currency terms.

Global bond markets delivered mixed results. In the US, bonds rose as economic data softened, and the Federal Reserve (the Fed) implemented its first rate cut of the year. In contrast, European bond markets faced headwinds. Persistent inflation concerns in the UK and political instability in France weighed on sentiment.

Key themes over the quarter included:

US labour market indicators deteriorated over the quarter. Job growth slowed, unemployment edged up to 4.3%, and continuing claims – representing individuals receiving ongoing unemployment benefits – rose steadily.

Adding to the downbeat sentiment, the Bureau for Labor Statistics (BLS) revised down nonfarm payrolls by 911,000 for the 12 months ending March 2025, signalling the job market has been under pressure for a prolonged period.

In September, the Fed cut interest rates by 25 basis points, bringing the federal funds rate to a range of 4-4.25%. While all members supported the cut, newly appointed Fed member Stephen Miran, backed by President Trump, advocated for a more aggressive 50 basis point reduction. The Fed currently projects two additional cuts before year-end.

The US signed trade deals with the European Union (EU) and Japan, helping to ease fears of escalating trade tensions. However, a US appeals court ruled that many Trump-era tariffs exceeded legal authority. The decision, effective from mid-October, could reshape future trade policy and market sentiment.

French financial markets came under pressure following the ousting of Prime Minister François Bayrou, who lost a parliamentary confidence vote over proposed austerity measures. President Emmanuel Macron swiftly appointed Defence Minister Sébastien Lecornu as Bayrou’s successor. The political shake-up added uncertainty to French markets.

In August, the Reserve Bank of New Zealand (RBNZ) lowered the Official Cash Rate (OCR) by 25 basis points to 3.00%, citing a string of softer economic indicators. The central bank also signalled that further rate cuts are likely by early 2026, as it seeks to support growth and manage inflation.

The decision followed a sharper-than-expected contraction in Gross Domestic Product (GDP) and persistent slack in the labour market.

New Zealand’s economy contracted by 0.9% in the June quarter, its third decline in five quarters. Annual GDP fell 1.1%, with per capita output down 2.8%, reflecting broad-based weakness, particularly in construction and manufacturing. Retail sales rose 0.5%, but overall confidence remained subdued.

Annual inflation ticked up to 2.7% for the three months ending June – still within the RBNZ’s target range, but cost-of-living pressures remain elevated, particularly in food and housing.

The unemployment rate rose to 5.2% in the second quarter, and forward-looking indicators point to continued slack in the labour market. Meanwhile, property values continued to drift lower, although falling mortgage rates are expected to support a gradual recovery heading into 2026.

Looking ahead, the RBNZ has signalled further rate cuts are likely, contingent on continued moderation in inflation and signs of economic recovery.

Global equity markets delivered stellar returns over the third quarter, with the US and Asia leading the way. Europe lagged, but most markets there still delivered positive returns.

In the US, both the S&P 500 Index and Nasdaq 100 Index extended their strong performance from Q2, climbing to record highs and posting gains of 8.1% and 11.4% respectively. The rally was broad-based, with 10 of the 11 S&P 500 sectors finishing the quarter in positive territory.

At a company level, major tech firms such as Nvidia, Apple, and Alphabet stood out with impressive returns, reinforcing investor confidence in the sector.

In Europe, the Euro Stoxx 50 Index posted a 4.5% return, while France’s CAC 40 Index rose 3.3% but underperformed amid political instability following the ousting of Prime Minister François Bayrou after the failed confidence vote.

Asian markets delivered standout performances. Japan’s Nikkei 225 Index saw double-digit gains, while China’s Shanghai Composite Index surged 13.9% to a 10-year high, driven by robust gains in AI-related sectors.

The NZX 50 Index advanced 5.5% over the quarter, behind several of its global peers. Its underperformance was driven by ongoing signs the economy continues to face headwinds, while business and consumer confidence remains subdued.

Of the 50 stocks in the local index, 37 finished with positive gains over the quarter. Of note, a2 Milk shares rose 17.1%, supported by elevated dairy prices, while news it will acquire Yashili New Zealand Dairy Company for $282m – paving the way for greater access to the Chinese market – also helped sentiment.

The weakest performing company was SkyCity Entertainment Group (-24.6%). Its shares fell sharply after it confirmed a $240m capital raise to address debt concerns. At 70 cents per share, the raise represented a heavy discount from its closing price prior to the announcement. 

In Australia, the ASX 200 Index ended the quarter up 4.7%, although the market finished well off its highs amid worries of persistent inflation. 

US bonds had an up-and-down quarter, initially coming under pressure amid fiscal concerns in relation to the ‘One Big Beautiful Bill Act’, which would see a sharp rise in debt. However, bonds saw a strong end to the quarter, largely driven by a slowdown in labour market data and the subsequent rate cut by the Fed. Over the quarter, the yield on the US 10-year government bond fell by 8 basis points, ending at 4.15%.

Meanwhile, European bonds were generally weaker. UK bonds fell after inflation remained unexpectedly high at 3.8%, largely driven by rising food prices, which climbed for a fifth consecutive month.

Elsewhere, French political turmoil weighed on bond markets there, while the European Central Bank (ECB) kept interest rates steady after a prolonged period of rate cuts.

New Zealand bonds rallied over the quarter, largely driven by the RBNZ’s 25 basis point cut and dovish shift. Weaker-than-expected growth data raised the probability of a larger move in October, which added to bond gains. The 10-year government bond yield fell to its lowest level in a year, ending the quarter at 4.19%, as investors priced in a more accommodative monetary outlook.

The New Zealand listed property sector delivered a strong performance over the quarter, rising 14.9%, buoyed by the RBNZ rate cut. Lower rates enhance the relative appeal of their income-generating cash flows, especially when compared to declining bond yields.

Meanwhile, listed infrastructure tracked most other global markets higher, but delivered more modest returns. Over the quarter, the FTSE Global Infrastructure (100% NZD Hedge) rose 4.0%.

Key themes as we look ahead include the following:

As we enter the final quarter of the year, the US labour market has emerged as a key driver for both equity and bond markets. Signs of weakness are becoming more evident – hiring remains subdued, and continuing jobless claims are hovering near multi-year highs.

Meanwhile, the significant downgrade in nonfarm payrolls for the 12 months ending March, suggests that labour market softness has been more prolonged than previously understood.

Further pressure may come from the looming government shutdown. If no agreement is reached, federal agencies have reportedly begun preparing “reduction-in-force” plans, which could result in layoffs for programs not backed by existing legislation.

Despite labour market concerns, broader economic indicators remain resilient. Revised Q2 GDP figures point to solid growth, and recent data shows an uptick in manufacturing activity (as measured by Purchasing Managers’ Indexes) and robust consumer spending. These trends suggest the economy is not deteriorating quickly enough to signal an imminent recession.

US bond markets traded within a narrow range during the quarter, as investors weighed a softening labour market against emerging inflation risks.

While falling energy and rental prices, along with delayed tariff increases, have kept headline CPI figures contained, there are signs of inflationary pressure building – particularly in the services sector. Most of our inflation indicators are now near the upper end of their recent ranges.

Historically, a rise in core inflation to around 3.5% has been a warning signal for both bond and equity markets. Given this, we remain highly attuned to incoming pricing data.

New Zealand’s economy went backwards in the second quarter, highlighting the case for further monetary policy easing. The RBNZ meets in early October, where the markets are pricing in a real possibility of a 50 basis point cut.

Regardless of the size of the next move, the key question is how low the OCR must go to stimulate growth. Markets are pricing the OCR to be below 2.50% by year-end – a plausible scenario if unemployment remains elevated and inflation stays within the central bank’s target range of 1% to 3%.