Market update – quarter ended 31 December 2025

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

Global shares

Global share markets experienced volatility in the December quarter but finished strongly, with the MSCI World Index – Net closing the period up 2.5% in unhedged NZD terms. Central bank decisions and concerns about tech valuations were the guiding stars for the period. Markets reacted to the US Federal Reserve’s (Fed) modest rate cut with a small surge however the indications that future cuts may be limited – a “higher-for-longer” position – tempered some of the reaction. Underlying inflation and unemployment figures sent central banks down divergent paths to end the year. In the United States, delayed jobs figures presented a mixed picture of the broader economy, leading the Fed to reduce the cash rate by 0.25%. The Bank of England also reduced rates while the European Central Bank kept rates stable, as did Australia. The Bank of Japan raised rates.

Optimism about AI – and then concern about overvaluation – drove a good deal of volatility through the quarter for tech-linked shares and was responsible for a large amount of upside in the quarter.  The end of the year was marked by a significant sell off in AI-related shares as concerns intensified after a disappointing sales outlook by chipmaker Broadcom and a report that Oracle has delayed building data centres for ChatGPT owner OpenAI.

At a country level, the benchmark US S&P 500 grew 2.4% while the tech-heavy NASDAQ returned 2.6% and the Dow Jones Industrial Average grew 4% reflecting solid performance from large-cap stocks while reflecting a slower tech rally. Korea and Taiwan posted some of the strongest quarterly returns, boosted by global demand for semiconductors. European equities, especially in the UK, gained on strong growth surveys. Japanese equities delivered solid gains again related to tech. China shares edged lower in Q4, weighed by weak domestic consumption. Japanese markets posted a strong quarterly gain (8.6%), as did the UK (6.9%) and Europe (4.8%) while China was flat (-0.2%). In terms of sectors, financial stocks in Europe and Japan performed well and consumer discretionary was a standout due in part to the holiday season. Healthcare was a relative underperformer, particularly in the US due to regulatory uncertainty and policy concerns. Energy was mixed due to low oil prices at the end of the year however commodity price swings drove materials higher.

Global bonds were positive for the quarter, returning 0.4% in hedged NZD terms. There was a steepening yield curve through the year and a rally in emerging markets bonds. A combination of investor demand, currency tailwinds, and strong economic fundamentals boosted the sector, along with a softer US dollar that started after tariff announcements in April. Credit spreads for both investment-grade and high-yield corporate bonds remained tight – or tightened – in the quarter. The tight spreads indicate concern about valuation, particularly in AI-related tech companies.

Domestic markets

The New Zealand share market performed well in the quarter, returning 2.0%, in line with the US S&P 500, outperforming Australia but underperforming Europe. Easing monetary policy was a key reason for the performance, as the Reserve Bank of New Zealand cut the official cash rate several times through the quarter, reducing borrowing costs and investor sentiment toward domestic equities. Business confidence rose on the rate cuts as well as external conditions, as trade concerns driven by US tariff announcements (and retaliatory moves) lessened through the period. Business confidence hit its highest level since 2014, according to research by private think tank New Zealand Institute of Economic Research. Inflation continues to be a concern with it reaching 3.0% in the September quarter which is the top end of the RBNZ’s acceptable band (1-3%). Economic activity was weak through mid-2025 but appears to be picking up.

The New Zealand bond market was flat over the period, returning -0.2%. Prices rose as yields fell along with the RBNZ’s aggressive rate cuts through the quarter, though the changes were not a surprise and had already been partly priced in. NZ bonds took cues from the global fixed-income market as interest rates and yield curves moved with US policy changes, including rate cuts. Additionally, changes to the New Zealand Debt Management Office bond issuance programme influenced market dynamics as near-term debt issuance was trimmed, helping to alleviate supply pressure and supporting government bond prices. The yield on New Zealand’s 10-year government debt closed the quarter at 4.53%.

How did markets affect FireSuper investment options?

With volatile share markets and only modest returns from bonds, overall performance was muted, but all member options still delivered positive returns over the quarter. The Conservative option returned 0.8%, Balanced 1.5% and Growth 2.2% after the deduction of fees and tax. The Cash option delivered a 0.5% return over the same period.

Over the last year the Conservative, Balanced and Growth options have returned 5.2%, 8.9% and 11.6% per annum respectively, after the deduction of fees and tax.

Looking ahead

There have been many market drivers over the past 12 months; from Trump returning to office, to central banks cutting rates and global economies demonstrating resilience, however, one key theme that has been a strong contributor to equity price appreciation over this period has been the accelerating adoption of generative AI across different sectors, leading to increased productivity and profitability. Looking to the year ahead, we see the tools expanding into new sectors   resulting in positive corporate results. There is also potential for reaccelerating US growth in the year ahead as policy drags that concerned investors through 2025 fade; we are seeing policy tailwinds building over coming quarters. There are still policy considerations that are weighing on the markets, including a hiring slowdown due to immigration restrictions and a cut back in government hiring – not due to firms reducing headcount because of a weak economy.

Despite many equity markets at or approaching all-time highs, along with valuations that are not cheap, our contrarian sentiment indicator (a measure of panic or euphoria in markets) is not showing unsustainable extremes of euphoria in markets, which we believe provides opportunity for markets to continue to move higher over the short term. Risks do exist, however, with a still uncertain geopolitical and a slowing US labour market important points of distinction for active management.

We believe non-US developed equities are more attractively valued than US equities and could benefit from USD weakness; a dynamic we’ve seen in 2025. However, we’re yet to see how large global thematics like artificial intelligence play out, with US markets likely to benefit from this. In emerging markets, investors have become more optimistic on Chinese equities following a series of monetary and fiscal policy support; though sustained growth will depend on further fiscal initiatives, particularly in infrastructure and technology. We expect that government bonds should act as portfolio diversifiers if the growth outlook deteriorates further from here.