2025 Wrap

Sharemarkets around the world generated almost exclusively positive returns in 2025. After several years in which the US has outperformed, the strongest performance (of the larger markets) was from the UK/Europe with gross returns around 28%, followed by emerging markets at 27%, with the US (S&P 500) still strong however, at around 14.8% (all in NZD terms). More locally, the Australian sharemarket outperformed us with a nearly 15% annual return, with the NZX 50 lagging behind at just 3.3% for the year. In terms of sector performance, European banks and the defence sector were both extremely strong, with metals and mining being the standout in the US. In the NZ sharemarket (NZX 50), the strongest performer was Sanford (78%), followed by A2 Milk (76%), and the Fonterra Shareholder’s Fund (72%). On the other end, the worst results were from Kathmandu Brands (-36%), Ryman Healthcare (-33%), and SkyCity (-33%). Once again, performance across global sharemarkets highlights the benefits of broad diversification to reduce risk and capture the strong gains. It is also important to note that fixed interest provided solid annual returns in the defensive end of portfolios. NZ government bonds returned 4.97% gross for the 12 months, whilst investment-grade corporate bonds ended the year up 5.51%. International bonds lagged a little at just under 4%.

Economic Developments

After a terrible few years for the NZ economy and several false starts, recent data is now convincingly indicating that we are turning the corner and things are picking up. The Reserve Bank (RBNZ) delivered a further 0.25% cut in late November and have given clear guidance that, barring any unexpected shocks, this will be the bottom for the foreseeable future. The latest GDP figures for the third quarter of last year were released on 18 December and showed a big jump of 1.1% for the three months, which was stronger than expected (although may partly reflect a rebalancing from the awful June quarter). Inflation, however, is creeping higher again. Having bottomed out at 2.2% at the end of 2024, official figures for 2025 were 3.1%, well above the target of 2% per annum. The combination of an improving economy and high inflation has led the market to expect the RBNZ to lift the OCR later this year. Wholesale interest rates are forward looking and have already increased quite significantly, particularly for longer terms, which has pushed up mortgage and deposit rates. House prices remain flat and there is now little sign of a pick-up in the short-term.

Whilst the global economy also generally appears in reasonable shape, there are certainly some significant ongoing risks which have emerged recently. The year started with an incredible “raid” by the US on Venezuela, which resulted in the President Nicolas Maduro being captured and shipped to New York on “narco-terrorism” charges. The US has been applying ongoing pressure to Venezuela over recent months, and there is also no doubt that oil is a major element in the equation, with Venezuela holding the world’s largest proven oil reserves.

President Trump had indicated that Greenland was the next “target”, although has backed down after resistance from Europe and some sort of deal behind the scenes. The US Department of Justice launched a criminal investigation into the Federal Reserve and its chair, Jay Powell. The investigation centres around spending on renovations to the main Fed building, but with Trump being highly critical of Powell’s interest rate policy over recent years, it seems to be a thinly veiled attack on the Fed’s independence. This caused interest rates to jump, but the announcement of Kevin Warsh as the next Fed Chairperson settled the situation, as he is seen as a relatively safe option.

 Market and Portfolio Positioning

The last quarter has seen an ongoing rotation in sharemarkets as investors reposition from an overconcentration in the US shares and the technology sector to broader holdings. Performance from Europe, Japan, and emerging markets exceeded the US in the quarter. After peaking in October, the tech sector (S&P 500 Information Technology Index) is now down 6.1% for the period.  Whilst frustrating for many in the short-term, this is ultimately a healthy development as high valuations in tech companies have been a concern, especially in the “AI” and semiconductor segments. It is certainly preferable for the market to adjust in a smooth and orderly fashion than to continue unsustainably, which can result in a sharper and more damaging correction. Whilst there is some way still to go, a refocus on companies in “old world” industries which are offering more attractive value and dividend streams is a positive development.

 Our portfolio approach remains relatively unchanged over the quarter, with a few key tactical positions employed at present:

• Slightly Defensive Asset Allocation: We maintain a small underweight to growth assets (shares and property/infrastructure) and a slight overweight to fixed interest across all risk profiles. This is primarily due to the high valuations in some sharemarkets and sectors.

• US Equity Underweight: Within international equities, we continue to hold an underweight position in US shares. As discussed above, there are more attractive options in European, Asian, and Australasian markets. Our international equity allocation is approximately 45% in the US, with the remainder allocated to emerging markets (primarily Asia) and Europe. This compares to the most often quoted index of global shares, the MSCI All Country World Index, which is made up of nearly two-thirds US shares.

• Currency Hedging: The NZD has been weak against the USD for some time, and despite strengthening from around US 57.5c at the end of October to almost US 60.5c now, is still undervalued according to most currency analysts. As a result, we are around 50% hedged against the US dollar to remove the impact of exchange rate changes. While currency movements are notoriously difficult to predict, we are utilising funds that employ various methods to hedge these currency exposures.

We’ll continue to monitor developments over what is likely to be an interesting year and believe that portfolios are well placed whatever market conditions may bring.

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