Commentary on the March 2025 quarter by Russell Investments, UniSaver’s investment manager and consultant

Global markets

Global share markets fell in the March quarter, with the MSCI ACWI Index ‒ Net returning -2.4% in unhedged New Zealand dollar (NZD) terms. Much of the decline was driven by increasing concerns US President Donald Trump’s aggressive and chaotic trade agenda will impact US and global growth. Tariffs are generally considered bad for growth, bad for consumers and bad for markets. Already analysts have begun to downgrade their US growth forecasts for this year, while recent data implies that confidence amongst US consumers is quickly fading. Indeed, Trump himself refused to rule out a recession brought on by his multiple trade wars. Meantime, markets have struggled to keep pace with Trump’s unpredictable behaviour and flip-flopping on tariffs, resulting in frequent and often wild swings in share market performance. Adding to the uncertainty was Trump’s declaration toward the end of the period that 2 April would be ‘Liberation Day’ for the US economy; the day on which he promised to announce sweeping ‘reciprocal’ tariffs on all US trading partners. [Note: After markets closed on 2 April, Trump announced higher-than-expected reciprocal tariff rates on over 180 countries and territories, causing global share markets to fall sharply on fears that a global trade war will impact a US economy that’s already showing signs of slowing. Trump’s plan will see a 10% levy applied to all trading partners, as well as double-digit reciprocal tariffs on many other countries he believes have treated the US unfairly.] 

At the country level, the US S&P 500 Index (-4.6%), the Dow Jones Industrial Average (-1.3%) and the tech-heavy NASDAQ Composite (-10.4%) were all lower for the quarter. Stocks also fell in Japan (-4.5%[1]) and China (-1.2%[2]) but rose in Europe (7.2%[3]) and the UK (5.0%[4]). Both European and UK share markets hit record highs over the period amid a general rotation away from US stocks and strong performances across defence-related names, which benefited from concerns over Washington’s commitment to the wider region.

New Zealand shares

The New Zealand share market underperformed its global counterparts over the period; the local market returning -6.2%[5]. Like its global peers, the New Zealand market was impacted by concerns Trump’s trade policy will damage the US and global economies. Stocks were also hindered by a series of underwhelming earnings results and a weak lead from US markets. Limiting the decline was the Reserve Bank of New Zealand (RBNZ)’s decision to cut the official cash rate by an outsized 0.50% in February. The move, which took the cash rate to 3.75%, came against a backdrop of easing inflation, a subdued labour market and softer economic growth; though subsequent data revealed the economy emerged from recession in the final quarter of last year, expanding 0.7% in the three months to 31 December 2024. The Bank also indicated that additional rate cuts were likely in April and May. Moreover, officials said they now expect the cash rate to hit 3.10% at the end of this year rather than in March 2027. [Note: the RBNZ lowered the official cash rate a another 0.25% (to 3.50%) in early April. The Bank has now cut interest rates by 2.00% since it began its easing cycle in August last year.] The local market also benefited from stronger-than-expected growth in China; our largest trading partner.

Global alternatives

Global listed property made relatively good gains in the first quarter, returning 0.6%[6] in hedged NZD terms. Contributing to the advance were lower US Treasury yields, further interest rate cuts in Europe and the UK, and encouraging Chinese growth. Beijing also unveiled further stimulus measures, including plans to stabilise the country’s property and share markets. 

The global listed infrastructure market also performed well over the period, returning 3.4%[7] in hedged NZD terms. Much of the gains were driven by strong performances from North America, where we saw a sharp decline in US Treasury yields, and Europe, where Germany passed a constitutional amendment to reform the country’s ‘debt brake’ policy. This will allow the government to increase spending on infrastructure and defence. Infrastructure stocks were also influenced by rate cuts in the UK and Europe and better-than-expected Chinese growth. 

Fixed income

Global bonds were positive for the quarter, returning 1.1%[8] in hedged NZD terms. Much of the market’s gains were driven by a decline in longer-term US Treasury yields, which fell as US growth concerns intensified amid Trump’s tariff agenda and inconsistent trade rhetoric. Bonds also benefited from their traditionally defensive characteristics in the face of heightened geopolitical uncertainty. Global credit markets were mostly weaker for the quarter. Spreads on US investment-grade debt and US and European high-yield debt all widened throughout the period, while spreads on European investment-grade debt narrowed, albeit modestly. 

The New Zealand bond market edged higher over the period, returning 0.7%[9]. Domestic long-term government bond yields rose (in aggregate) in the first quarter; though only modesty. Yield movements were influenced by competing factors, including the uncertainty caused by Trump’s trade policy, mixed economic data, a series of underwhelming earnings results and the RBNZ’s outsized interest rate cut in February. The yield on New Zealand 10-year government debt closed the quarter just eight basis points higher at 4.49%. 

How did markets affect UniSaver’s investment options?

With share markets falling, the Balanced and Growth options delivered negative returns in the first quarter of 2025, while Conservative and Cash were positive. Over the last 12 months the Conservative, Balanced and Growth options have returned 3.8%, 5.3% and 6.1% respectively, after the deduction of fees and tax. 

Looking ahead

Last year saw equity markets benefit from easing inflation globally, a resilient US labour market and a robust US economy, despite the Federal Reserve’s restrictive monetary policy. However, this is now all in the rear-view mirror. So far this year, we’ve seen a significant decline in consumer confidence. And whilst hard data has maintained its resiliency overall, the question is whether this can last?

We recently lifted our probability of a US recession in the next 12 months from 30% to around 50%. This change was driven by the uncertainty surrounding Trump’s policies, the likely one-time increase his policies will have on inflation and the subsequent impact higher inflation will have on growth in the short to medium term.

Whilst US equities have posted strong returns over the medium term, a fast change in market sentiment led to the rise in volatility and swift repricing of equities we witnessed in March and April. We remain mindful that valuations are still elevated, and the cycle remains uncertain, increasing vulnerability to negative surprises. Recent market dynamics have demonstrated the importance of diversification within investment portfolios, with Europe and emerging markets having outperformed US stocks so far this year.

We believe non-US developed equities are more attractively valued than US equities and could benefit from US dollar (USD) weakness; a dynamic we’ve seen in recent months. However, given the risk of a US recession and the USD’s traditional ‘safe haven’ characteristics, we maintain a relatively neutral stance on non-US developed equities. 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.

For fixed income assets, we believe US, UK and German government bonds offer reasonable value. We expect that government bonds should act as portfolio diversifiers if the growth outlook deteriorates further from here.

Private credit and infrastructure markets offer compelling alternative investment opportunities, with these assets benefiting from their resilience in a higher interest rate environment.

In the currency space, the USD appears overvalued in real trade-weighted terms, while other currencies, including the Australian dollar and the Japanese yen, offer relative value.

[1] Tokyo Stock Exchange Tokyo Price Index (TOPIX)
[2] Shanghai Shenzhen CSI 300 Index
[3] Dow Jones EuroStoxx 50 Price Index
[4] FTSE 100 Index
[5] S&P/NZX 50 Index with imputation credits
[6] FTSE EPRA/NAREIT Developed Real Estate Index Net NZD Hedged
[7] S&P Global Infrastructure Index (NZD hedged)
[8] Bloomberg Global Aggregate Index – $NZ Hedged
[9] Bloomberg NZ Bond Composite 0+ Yr Index