Investment Update

US equity indices enjoyed a strong finish to the year, on optimism that Donald Trump’s return to the White House would be good for local businesses. All three of the major indices recorded record highs, before falling back in the final few weeks following December’s Federal Reserve (the Fed) meeting, where the central bank scaled back its expectations for future rate cuts. Markets elsewhere delivered mixed results. Against this backdrop, the MSCI All Country World Index rose 1.0% over the quarter. 

In contrast, global bonds were weak, held back by the idea that interest rates would not fall by as much, or as quickly as previously expected. The Barclays Global Aggregate Index (100% hedged to NZD) fell 1.2% over the quarter. 

Donald Trump defeated Vice President Kamala Harris to win the 2024 US election. Trump’s victory, and the Republican sweep of Congress, was largely seen as good news for equity markets with deregulation and pro-business policies likely to support local companies. Trump has vowed to put tariffs on Chinese imports, while he also said he would impose tariffs of up to 25% on Canada and Mexico. 

The US economy continued to power ahead. Inflation, as measured by the Personal Consumption Expenditures (PCE) price index, has moderated but remains above the Fed’s 2% target. Meanwhile, the latest non-farm payrolls report showed a gain of 227,000 jobs in November, signalling strong labour demand, even if the unemployment rate edged up slightly, to 4.2%. And growth, as measured by Gross Domestic Product (GDP), grew at a healthy 3.1% pace in the third quarter, propelled by consumer spending. The data highlighted some of the challenges its central bank is having to navigate.

Following its 50 basis point cut in September, the US central bank followed this up with two further 25 basis point cuts in November and December. The Fed’s easing bias was generally supportive of markets, however at its latest meeting it indicated a more cautious approach going forward – forecasting only two rate cuts in 2025, down from the four it predicted previously. This put financial markets on the back foot heading into year-end. 

The Reserve Bank of New Zealand (RBNZ) rounded out the year by delivering two back-to-back 50 basis point cuts to the Official Cash Rate (OCR). Inflation dropped to within the central bank’s target range, while other data showed the economy fell into recession. 

Inflation, as measured by the Consumer Price Index, fell to an annual rate of 2.2% for the period to 30 September, inside the 1-3% target range. While prices are still rising, they’re doing so at a slower rate – giving the RBNZ confidence that inflation is coming under control. Meanwhile, growth, as measured by GDP, fell 1.0% in the third quarter. It followed a 1.1% slump in the previous quarter. These were the biggest quarterly falls since late 2021 – at the height of the Covid-19 pandemic and lockdowns. 

Other economic data remained mixed. Retail sales have now registered nine consecutive quarters of decline, while unemployment rose to 4.8% in the September quarter, up from 4.6% previously. However, December’s business outlook showed signs of improvement, with the “past own activity” measure showing a decent jump, suggesting demand may be recovering. 

US equity markets had a strong quarter, rallying hard following Trump’s election victory, only to fall back slightly in December as the prospect of further aggressive cuts from the Fed diminished. The S&P 500 Index rose 2.4%, the Dow Jones Industrial Average was up 0.6% and the NASDAQ 100 Index gained a solid 6.3% - all hitting record highs. At a sector level, consumer discretionary led the gains, followed by communication services, while at the opposite end of the spectrum, materials and healthcare were the worst performers. 

Over in Europe, share markets declined. Growth in the eurozone – while still expanding – lags the US, and its economies are expected to be impacted by some of Trump’s protectionist policies. With inflation continuing to decline, the European Central Bank (ECB) cut interest rates a further two times, each by 25 basis points, but this did little to lift share markets. The Euro Stoxx 50 Index ended the quarter down 1.8%. In the UK, the FTSE 100 Index fell 0.2%, as a rebound in inflation there prompted its central bank to pause its recent rate-cutting cycle. 

Asian markets were higher. Japan’s Nikkei 225 Index was up 5.4%, supported by a weaker yen. Meanwhile, China’s Shanghai Composite Index rose 0.7%, as its central bank made cuts to its loan prime rates in moves designed to stimulate its economy.

The NZX 50 Index outperformed many of its overseas counterparts, gaining 5.5%. The market was supported by the 100 basis points of easing in the OCR, and a reporting season where earnings held up reasonably well. 

In Australia and despite hitting an all-time high, the ASX 200 Index fell 0.8%, as it took its direction from those of its key trading partners. With China’s economy weak (relative to its historical performance at least), it was little surprise to see the materials and energy sectors leading the Australian market lower. In contrast, the financial sector was the best performer. The Reserve Bank of Australia (RBA) is one of the only major central banks yet to cut interest rates, despite GDP there falling to its slowest annual pace since the pandemic.

Global bond markets were weak, despite most central banks delivering rate cuts. Ordinarily, lower interest rates are good for bond investors. In the US, the Fed lowered interest rates by 25 basis points in December (on top of the 25 basis point cut it delivered in November). However, it said that slower progress on inflation, strong growth and relatively stable unemployment translated to a slower pace of rate cuts ahead. It also predicted that it would lower interest rates twice in 2025, down from its previous guidance of four cuts. This put bond markets on the back foot, as it means interest rates are likely to fall more slowly than previously expected. As a result, the yield on the US 10-year government bond rose 79 basis points, to 4.57%. When bond yields rise, their prices fall. 

Bond markets elsewhere also delivered negative returns, but held up better that US bonds. European bonds outperformed given the bleak economic backdrop and further falls in inflation there, paving the way for more rate cuts from the European Central Bank (on top of the 50 basis points of cuts it delivered during the quarter). Meanwhile, UK bonds lost ground, as a pick-up in inflation there prompted the Bank of England (BoE) to leave interest rates on hold in December.

New Zealand bonds largely took their lead from their international counterparts, but managed to deliver a small positive return over the quarter. Inflation fell back to within the RBNZ’s target range, and a weaker economic backdrop saw the New Zealand economy return to recession. This prompted the central bank to meet market expectations and deliver 50 basis point cuts in both October and November. 

Over the quarter, the yield on the New Zealand 10-year government bond rose 17 basis points, to 4.41%. 

New Zealand listed property had a negative quarter, down 1.9%, despite the backdrop of falling interest rates. The Australian (-6.0%) and international listed property (-7.9%) sectors were also lower, as was international listed infrastructure, with the FTSE Global Core Infrastructure 50/50 Net Index (100% hedged to NZD) down 3.3%. All these sectors struggled against the backdrop of rising global yields. 

Equity markets were higher over the quarter, while bond markets lagged. Equities were driven by optimism that President-elect Donald Trump’s policies would be supportive of businesses and ongoing economic growth. Meanwhile bonds faltered because investors felt that these same policies could lead to a rebound in inflation, prompting the Fed to slow down its pace of easing – which appeared to be the case following its December meeting. As we assess the outlook for the global economy, here are some key themes we are watching out for: 

The divergence between the economic strength of the US and the rest of the world continues to be a theme. We expect major central banks outside of the US to continue their easing cycles, although recent upticks in inflation in some countries could see a pullback in this trajectory.

We have seen a repricing of expectations for US monetary policy following the Fed’s December meeting. Markets are currently pricing in a 90% chance the Fed will leave interest rates unchanged when it next meets on 29 January 2025. 

US equities continue to see good momentum and inflows remain robust. Technically, a sustained close above the 6,000 level could provide further upside for the S&P 500 Index. However, we are cautious on valuations, which are stretched at these levels. 

The macroeconomic environment continues to support an easing stance from the RBNZ, though a slowdown in pace is expected in 2025. Following its November meeting, many have advocated for another 50 basis point cut in February, especially following the weak third quarter GDP print.