We hope everyone is settling well into the new year. This update will cover key market indicators, discuss emerging opportunities, and offer our perspective on the current economic climate to help you make informed investment decisions.
The New Zealand Monetary Policy Committee (i.e., Reserve Bank) lowered the Official Cash Rate (OCR) by 0.50% to 3.75% last month. If economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025.
It is great for borrowers—especially those with mortgages coming up for renewal—but not ideal for savers who’ve been enjoying higher term deposit rates. If rates drop significantly, it could also push asset prices (like shares and property) higher, as investors chase better returns.
Even though interest rates are coming down, there are many options we can include for savers in the investment world to improve returns and achieve your long-term goals.
Global political and economic landscapes are shifting, with central banks facing pressures from ageing populations, de-globalisation, climate change, and technological advancements. Fiscal policies are likely to become more expansionary, with both radical and moderate leaders increasing spending on defence, AI-driven education, and climate initiatives.
Inflation remains a key concern, particularly in the US, where recent high consumer price levels and Trump’s policies may keep rates elevated. The Fed is expected to hold rates until inflation shows signs of decline. Geopolitical tensions, including the Middle East and Russia-Ukraine discussions, may bring market stability, while safe-haven assets like gold have surged, hitting record highs.
As long as uncertainty persists, we can expect safe-haven assets like precious metals, such as gold, to rise in value. Gold has delivered impressive results, increasing by around 44% for the last 12 months and hitting multiple record highs. The metal has outperformed most major asset classes, with prices exceeding $2,935 per troy ounce this month, marking its strongest annual performance in over a decade.
Markets are expected to remain volatile in the short term but trend upward in the long run. In New Zealand, the slowing economy may prompt interest rate cuts, creating buying opportunities.
The NZ dollar has recently weakened, trading around 0.56 to 0.57 to the USD, below its long-term average of 0.62–0.65. At these levels, adding a hedge could provide added benefits to your portfolio. Additionally, it's important to keep an eye on the Chinese renminbi (RMB) against the USD, as potential tariff policy changes may prompt adjustments to China's exchange rate strategy.
Another area to watch is valuations, especially in the tech sector, which appears somewhat overvalued. Developments in Chinese AI could lead to price fluctuations in US AI tech companies. It remains to be seen whether lower-cost AI models like DeepSeek will continue to disrupt the market or if more powerful language models will maintain their lead in this highly competitive space.
In conclusion, diversification is essential for effective portfolio management. It involves spreading your investments across various asset classes, such as cash, bonds, property, and shares. Additionally, it's important to invest in different industries, like infrastructure or financials, and across different geographical regions, such as New Zealand and Europe.
If you would like to discuss your current portfolio, maturing term deposits, retirement planning needs, or any other financial matters, please feel free to give our office a call at 09 553 8928 or email us at info@trilogyfs.co.nz.
Sincerely,
The Team at Trilogy Financial Solutions
Market Update
NZ
Interest rates: In February, the Reserve Bank of New Zealand (RBNZ) reduced the Official Cash Rate (OCR) by 0.5%, bringing it down to 3.75%. This decision marks the fourth consecutive rate cut since August 2024, totalling a reduction of 1.75%. The RBNZ's move aims to stimulate the economy amid subdued activity and rising unemployment. Inflation currently stands at 2.2%, within the RBNZ's target range of 1% to 3%. The central bank has indicated the possibility of further easing throughout 2025 if economic conditions continue as projected. We expect the OCR to bottom out at around 3.25% (possibly over two quarter-percent cuts).
Overall Outlook: Cautious optimism for the New Zealand market as we enter 2025.
Business Confidence: At its highest level since 2021.
NZX 50: New Zealand equities have remained relatively flat since the start of the year. Historically, lower interest rates have often spurred market activity, and we believe the anticipated rate cuts could provide a similar boost to the NZ market.
Key Sectors: Energy and infrastructure present growing opportunities.
Tech Companies: New Zealand tech companies remain attractive to investors.
Restructuring/Liquidations: May offer strategic entry points for savvy investors.
US & Trump policies
US Consumer Spending: Currently supported by wage gains, wealth, savings, and confidence. However, lower-income consumers face risks from sustained high interest rates.
Tariffs: Potential for increased tariffs on China (and possibly Europe), with a small chance of universal tariffs. Tariffs act as a tax on US consumers and will likely increase domestic inflation.
Immigration: Potential deportation of illegal immigrants (legality uncertain). Reduced immigration lowers labour supply, which is inflationary.
Taxes: Potential corporate tax cut from 21% to 15%, increasing the fiscal deficit and potentially pushing government bond yields higher due to increased issuance.
Oil: Proposed increase of 3 million barrels/day to offset inflationary impact of other policies. Difficult to achieve due to shale companies' reluctance to operate at lower oil prices.
Economic backdrop
Fiscal Policy: Investor concerns are rising about large and persistent deficits in developed markets. These deficits necessitate increased government bond issuance, putting upward pressure on interest rates.
Inflation: Global disinflation is happening but stalling above target in most regions. UK inflation may rise due to base effects, but economic weakness could lower it medium-term. US inflation faces upside risks from tariffs and immigration policy.
Market Dynamics: Strong US dollar impacting emerging markets; rising trade tensions; higher dispersion across stocks/styles/sectors/countries expected; tech (especially AI) offers opportunities. Geopolitical conflicts and trade restrictions pose risks. Diversification and careful monitoring are crucial.
