For investors, the economic situation in December 2024 presented a challenging environment. New Zealand remained in a recession as local GDP declined -1.0% during the September quarter, driven by reduced consumer spending and inflation, negatively impacted investments. Global central banks cut interest rates, providing relief, however overall economic uncertainty had a greater effect on investment returns as the global economy prepares for 2025. The US Federal Reserve's commentary played a significant role in this, as they indicated a slower pace of interest rate cuts in 2025, compounded by ongoing political uncertainty in Europe and other regions.

In the US, job growth is a positive, but rising core consumer prices indicated inflationary pressures. Internationally, mixed market results meant that some investments performed well while others did not.  Global equity markets in local currency outperformed New Zealand Dollar hedged equivalents due to the underperformance of the New Zealand currency during December which fell -5.3% against the United States Dollar. Locally, despite the disheartening New Zealand Gross Domestic Product (GDP) announcement, which indicated a further contraction to the economy, the New Zealand Index (NZX50) outperformed the Australian equivalent (ASX200), returning 0.4% compared to -3.2%.

In the fixed income market, which includes government loans, performance was disappointing. Government bonds lost value as the U.S. Federal Reserve (Central Bank) indicated it would be careful about cutting interest rates in the future, causing markets to reevaluate their predictions. In the commodity market, results were mixed. Iron ore ended the month slightly lower reflecting the possible impact of tariffs on China. Copper prices were also lower in December. Oil saw strong gains over the month following disruptions to oil flow in the Middle East. Gold prices stayed the same as trading slowed down for the holidays.

Interest-sensitive assets, like real estate investments, faced difficulties due to rising bond yields, making them less attractive. Interest rates decreased in December and are expected to continue to do so. Additionally, the expected increase in New Zealand's Official Cash Rate could have led to higher borrowing costs, further impacting investment decisions.

Significant Developments Include:

• In December, New Zealand’s quarter-on-quarter (QoQ) GDP contracted -1.0% in Q3, far more than economists had predicted.
• Central Banks around the world cut interest rates in December and are likely to continue at a more gradual pace, except in Japan where rates are expected to rise as it emerges from a period of deflation.
• The Reserve Bank of Australia (RBA) kept interest rates unchanged at 4.35% for the ninth consecutive meeting.

Upcoming in 2025

New Zealand: Expecting Rate Cuts in 2025

• The NZ economy is likely to remain weak due to high interest rates (the cost of borrowing money) and rising living costs, which are reducing consumer spending.
• The Reserve Bank of New Zealand may be overly aggressive in planning rate cuts given the ongoing economic struggles; further cuts are expected in Q1’25.
• Domestically, we prefer New Zealand government bonds (loans to the government) over cash, as interest rates are likely at their peak for this cycle.

International: Mixed Economic Growth

• Global economic growth is expected to remain strong but vary by region, with the US experiencing slower activity.
• US President-elect Trump presents both potential benefits and risks for growth and inflation.
• Central banks are likely to continue cutting rates as inflation eases, but at a slower pace.
• Japan is expected to perform well economically due to income growth and capital investment, leading us to favour Japanese stocks and global real estate investments, as they have strong fundamentals and good value.