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 a number of 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. After peaking at 5.5% in 2023, the OCR now sits at 2.25%. It seems that these cuts and those previously delivered are finally filtering through. The latest GBP 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). Anna Bremen, until recently deputy at the Swedish Central Bank, started as the new RBNZ Governor at the beginning of December and it will be very interesting to see how things evolve over the next few years under her leadership.

 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 it is certainly true that the Maduro regime is a brutal dictatorship. However, 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 has now indicated that Greenland is the next “target”, which the US intends to acquire “one way or the other”. It is highly likely that a US move on Greenland will result in the end of the NATO alliance as we know it, which is a major reshaping of the international order. Finally, in the last couple of days, the US Department of Justice has 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.

Market Positioning

There is increasing coverage in the media around valuations in the US sharemarket, and especially in the large technology companies. These have ridden the wave associated with the rise of AI since the launch of “ChatGPT” at the end of 2022. It is certainly true that the so-called “Magnificent 7” tech companies are trading at very high valuations, averaging somewhere around 30x underlying earnings (which, for example, means that if the company makes $1 per share in earnings, the share price would be $30). As a major proportion of US sharemarkets, this group is a primary contributor to US markets, which as a whole are looking expensive at around 22x earnings, compared to a long-run average of about 18x. Over the last couple of years, the tech sector has grown profits at a rapid rate, which has justified high valuations. However, the question remains as to whether this growth rate can continue, and if not, whether a normalisation of earnings results in a decline in US markets.

 My general view is that while I believe AI is undoubtedly going to be a long-term factor in all of our lives (for good and bad, whether we like it or not), the recent hype is likely overdone and the expectations for growth are unrealistic. However, whether this constitutes a “bubble” really depends on what definition is applied to the term, and in some sense, this is irrelevant. The important point is that this sector is trading at high valuations, and history tells us that valuations tend to move toward their long-term averages at some point. Therefore, it is sensible to have a lower relative weighting in your portfolio to the technology sector and hold a higher weighting in areas which are more attractively priced. However, high valuations can persist for long periods of time, and so holding some exposure to these growth companies is still justified. It is worth noting that while valuations in US tech are expensive, when compared with past market “bubbles”, such as that which led to the “Dotcom” crash in 2000, they are nowhere near as extreme. At that time, startup companies which were not even profitable were trading at up to 80x-100x revenue.

Investment Strategy

Our investment management approach is essentially unchanged is relation to the previous quarter. While always fundamentally "long-term strategic," we are employing three main tactical positions to try to improve returns and reduce risk:

• Mildly Defensive Asset Allocation: Compared to long-term positioning, we maintain a modest underweight to growth assets (shares and property/infrastructure) and a slight overweight to fixed interest across all risk profiles.

• US Equity Underweight: Within international equities, we continue to hold an underweight position in US shares. European, Asian, and Australasian markets offer more attractive valuations by comparison. To provide context: while US markets represent approximately 65% of global market capitalisation, our international equity allocation is approximately 45%, with the remainder allocated to emerging markets (primarily Asia) and Europe.

• Currency Hedging: The NZD is weak at present, trading around US 58 cents, and as a result we are around 50% hedged against the US dollar. In general, we expect the NZD to remain weak over the next 6-12 months, but the risk is that it will rise sooner than expected. Should this occur, even assets with flat USD performance would decline when converted to NZD. While currency movements are notoriously difficult to predict, we are utilising funds that employ various methods to hedge these currency exposures.

 We continue monitoring market and economic developments closely and will recommend portfolio adjustments when we believe they are warranted.

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