The gift of calm
December saw most Milford Funds post small gains as share markets were flat to slightly higher on the month. Bond and lower-risk funds saw weaker performance as NZ and Australian bond prices were softer.
Financial markets in 2025 were whipsawed by policy driven volatility as tariff announcements on April’s ‘Liberation Day’ saw share markets drop precipitously. Elsewhere, the ongoing AI arms race saw plenty of speculation in markets as investors chased winners in the new technology era. After all this drama, more muted markets in December are something of a relief with little volatility in broad markets or underlying stocks. It was encouraging to see Australian shares recovering after a few months of underperformance.
Local NZ and Australian bond markets have been coming to grips with the prospect of no more interest rate cuts from either the Reserve Bank of Australia or Reserve Bank of New Zealand. This saw weaker bond prices in November and the trend continued modestly into December. We have been using this weakness to add exposure as the higher yields on offer start to look more attractive (especially compared to other bond markets, notably the US). Moves in bond markets have also seen the NZ and Australian dollars appreciate recently. We had increased our exposure to these currencies over the last month or so.
Looking ahead to 2026, we are optimistic that the global economy will likely experience a modest but broad-based policy induced upswing. AI spending by technology companies and businesses in general will also be ongoing.
Economic risks are two sided. Fiscally induced economic growth could fuel inflation, threatening global bond markets. Or AI powered productivity gains could offset inflationary impacts, but threaten the health of the already precarious US labour market.
Against this economic backdrop, investors have to contend with share market valuations that are stretched, although most of the overvaluation is contained in the technology heavy US market. Broader economic growth and AI productivity gains potentially accruing to non-technology companies support a more diversified investment approach. Much like the year gone, we are likely to see plenty of surprises along the way and investors should be alert to risks of greater volatility – potentially in both directions.
