Market update – quarter ended 31 December 2024

Commentary on the December quarter by Russell Investments, FireSuper’s consultant.

Global markets

Global share markets performed well in the December quarter, with the MSCI ACWI Index ‒ Net returning 12.4% in unhedged New Zealand dollar (NZD) terms. Much of the gains were driven by US markets, which rose strongly in the wake of Donald Trump’s decisive victory in the country’s presidential election. Trump’s proposed policies, including promises of lower taxes and less corporate regulation, are generally considered to be more growth friendly. In saying that, Trump’s win did raise concerns that his pro-growth policies, together with the threat of tariffs, could stoke inflation and impact the pace of US interest rate cuts.

For its part, the Federal Reserve (Fed) cut interest rates twice over the period, taking its benchmark fed funds rate to a target range of between 4.25% and 4.50%. However, the Bank also signalled that it now expects to cut rates just twice in 2025; two less than it projected in September. The change in the projected number of rate cuts comes amid a combination of persistent inflation, which has trended sideways in recent months, a resilient jobs market and a robust economy. Elsewhere, both the European Central Bank and the Bank of England cut interest rates during the period, while the Bank of Japan left its overnight call rate on hold. Limiting the gains was lacklustre Chinese growth, higher long-term government bond yields and heightened geopolitical risks.

At the country level, the US S&P 500 Index (2.1%), the Dow Jones Industrial Average (0.5%) and the NASDAQ Composite (6.2%) all hit record highs over the period. The NASDAQ Composite even closed above the 20,000 point mark for the first time. Stocks were also higher in Japan (5.3% ) but fell in Europe (-2.1% ), China (-2.1% ) and the UK (-0.8% ).

New Zealand shares

New Zealand shares also made good gains in the fourth quarter; the local market returning 5.6%. Stocks benefited from the Reserve Bank of New Zealand (RBNZ)’s decision to cut its official cash rate by 0.50% at each of its October and November meetings. Inflation in New Zealand is now close to the midpoint of the RBNZ’s 1-3% target range, while economic growth and the labour market remain weak. The local economy shrank 1.0% in the three months to 30 September, which followed the 1.1% contraction we saw in the June quarter. Officials expect economic growth to recover in 2025 as lower interest rates spur investment and spending, though employment growth isn’t likely to pick up until midway through the year. Importantly, the Bank left the door open for more rate cuts in the near term. Stocks also benefited from Trump’s election win in November and signs of a recovery in domestic company earnings. Limiting the local market’s gains was the Fed’s hawkish pivot toward the end of the period and disappointing growth in China, New Zealand’s largest trading partner. At the sector level, information technology, energy and industrials recorded very strong gains over the period, while materials, consumer staples and real estate were all weaker.

Global alternatives

Global listed property fell sharply in the fourth quarter, returning -7.5% in hedged NZD terms. Contributing to the decline was a sharp rise in long-term government bond yields, which climbed on the back of Trump’s decisive win in the US presidential election and expectations of fewer US rate cuts.

The global listed infrastructure market made modest gains over the period, returning 1.0.%  in hedged NZD terms. Much of the gains were driven by strong performances from North America and Australia. Asia ex Japan also performed relatively well, while the UK, Continental Europe and emerging markets were all weaker; the latter impacted in part by Chinese growth concerns. At the sector level, energy was the best performer over the period, benefiting from higher oil prices. Airports and marine ports also performed well, while water utilities, electric utilities and renewables all struggled.

Fixed income

Global bonds were weaker for the quarter, returning -1.2% in hedged NZD terms. Longer-term government bond yields rose (prices fell) over the period, driven by Donald Trump’s election win and the Fed’s hawkish pivot. Bonds were also impacted by further political turmoil in major European economies Germany and France. In contrast, bonds benefited from their traditionally defensive qualities in the face of heightened geopolitical risks. Global credit markets were stronger for the quarter, with spreads on US and European high-yield and investment-grade debt narrowing throughout the period. A stronger US dollar (USD) saw hard currency emerging markets debt outperform local currency emerging markets debt.

The New Zealand bond market edged slightly higher over the period, returning 0.7%. Domestic long-term government bond yields rose (in aggregate) throughout the quarter; though not as much as their global counterparts after the RBNZ cut interest rates in October and November. The yield on New Zealand 10-year government debt closed the quarter 17 basis points higher at 4.41%. Local credit markets were flat for the quarter, with spreads unchanged over the period.

How did markets affect FireSuper investment options?

Equity markets were strong again in the fourth quarter but weakness in fixed income markets dragged down performance for the member options. The Conservative option returned 1.0%, Balanced 1.2% and Growth 2.5% after the deduction of fees and tax. The Cash option delivered a 0.9% return over the same period.

Over the last year the Conservative, Balanced and Growth options have returned 6.4%, 11.5% and 16.3% respectively, after the deduction of fees and tax.

Looking ahead

2025 will be another year of overcoming challenges and redefining limits against a backdrop of high U.S. equity market valuations, mega-cap dominance, and the uncertainty surrounding the policy agenda of U.S. President-elect Donald Trump.

Looking into 2025, we anticipate a soft landing for the U.S. economy. Our assumption is that the new administration will ease its more aggressive stances on tariffs and immigration. With these dynamics in mind, here are our key economic views for 2025:

1.      U.S. Growth and Policy Trade-offs

The U.S. economy is expected to grow at a trend-like pace of 2.0% in 2025 in response to the lagged impact of tight Fed monetary policy. Core personal consumption expenditures (PCE) inflation is projected to move closer to the Fed’s 2% target, while the central bank eases rates gradually, with the fed funds rate likely to reach 3.25% by year-end—aligning with its neutral level.

Our working assumption is that the new administration will not aggressively pursue policies that create inflation risk. One clear message from the election is that U.S. voters were unhappy with the inflation of the Biden years. Tariffs and immigration controls are likely to be implemented, but their extent will be constrained by the inflation outlook. On balance, we see the policy mix as supportive for business confidence, which is likely to drive a resurgence in capital markets and provide positive tailwinds for private assets.

2.      Global Headwinds and Policy Divergences

Outside the U.S., growth will likely remain under pressure. Trade policy uncertainty and tariffs will weigh heavily on Europe. The European Central Bank (ECB) is likely to cut its deposit rate to 1.5% by year-end to offset the tariff impact and the continued stagnation of the German economy.

The UK faces sluggish productivity growth, labour constraints, and inflationary impacts from higher taxes under the new Labour government. The Bank of England’s (BoE) capacity to ease is constrained, with the base rate likely to decline only modestly to 3.75%–4.0%.

Japan remains an outlier, supported by a virtuous wage-price spiral that will anchor inflation expectations near 2%, allowing the Bank of Japan (BoJ) to further normalise policy. Rates could rise to a 30-year high of 0.75% by year-end.

China faces headwinds from the property market collapse, deflation pressures, and U.S. tariffs. The policy response continues to be reactionary, rather than one where proactive steps are taken to solve structural problems such as high savings and low household consumption.

3.      Market Sentiment and Valuations

Three defining features of the market outlook for 2025 are the elevated level of the S&P 500 forward P/E (price-to-earnings) ratio at 22x, the potential for further U.S. dollar strength, and the direction of the U.S. 10-year Treasury yield.

In New Zealand, easing monetary policy is improving the outlook. Risks include China-related exposure and trade surplus, though we expect the Reserve Bank of New Zealand to cut rates more aggressively than the RBA.