Taking Stock 11 December 2025 

Recap of the year

Fraser Hunter Recaps 2025

2025 began in difficult shape. The economy was soft, confidence was low and households were still absorbing the impact of the fastest rate-hiking cycle in a generation. GDP slipped again early in the year, unemployment continued to rise and the sharp slowdown in migration removed a key source of momentum. For much of the first half, it felt as though the economy was still moving backwards.

The tone shifted meaningfully as the year progressed. Inflation fell back inside the Reserve Bank’s target range, interest rate cuts began to take effect and business confidence improved sharply. By November, the ANZ Business Outlook survey recorded its highest confidence reading in more than a decade, supported by firmer expectations around future activity. 

Consumer confidence also lifted from earlier lows, suggesting households were becoming more comfortable with the economic backdrop. Markets steadied, the housing downturn ended and fixed income began to behave more normally again. By late 2025, the early signs of renewal were visible across multiple fronts.

Anecdotally, sentiment appears to have improved around the summer bbq as well. After a cautious year, people have entered December seemingly both relieved and happy to be busy. Activity picked up heading into Christmas, and many businesses reported stronger forward pipelines running well into the new year. The mood was not exuberant, but it was clearly better than it had been for some time.

New Zealand also stands out internationally. While several major developed economies spent 2025 slowing toward recession, New Zealand had already been through one. Many of the pressures still building overseas were absorbed here earlier, giving the economy a head start in the adjustment process. Our small scale and flexible labour markets make us sensitive to global conditions, but they also allow us to adapt more quickly. We enter 2026 from a lower and more defensive base, with more of the hard work already behind us.

Recent company outlooks reinforce this shift. Earnings guidance has stabilised across a wide range of sectors and early economic data shows a lift in sentiment among businesses and households. These are early signals rather than declarations of strength, but they align with a base case for 2026 that is more positive than we have seen for some time. Growth is likely to be steady rather than sharp, but the direction is improving and the foundations look more balanced than they have in several years.

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The New Zealand share market delivered a steady but uneven year in 2025. The NZX50 Gross Index has returned just 2% for the year to date (includes dividends), but this headline figure hides a much stronger improvement beneath the surface. After being down nearly -10% in April, the broader market recovered strongly as confidence improved and interest rates fell.

The improvement becomes more prevalent as you move away from the large caps. The portfolio index, which caps large companies at 5% of the index, has gained +8%, while mid-caps rose around +18% and small-caps +25%, responding early to falling rates and improving confidence.

Companies on the local market tend to fall into three broad groups. Income producers, including the gentailers, key infrastructure assets, and parts of the listed property sector provide defensive and tax-efficient income. A second group is made up of structural growth companies whose prospects depend more on market opportunity and execution than on domestic cycles. 

The third group consists of cyclical businesses tied to housing, tourism, construction and freight, which usually lead recoveries when confidence turns. In a concentrated index like the NZX50, these differences matter, and a well-constructed portfolio can look very different from the benchmark. Depending on risk appetite, there are opportunities across all three groups, and 2025 showed that returns do not rely solely on the largest index names.

Conditions improved late in the year as lower interest rates eased household pressures and helped earnings expectations stabilise. Listed property, utilities and several cyclical sectors began to recover as confidence returned. Fonterra’s planned divestment and upcoming capital return also added a lift, particularly for regional communities. A weaker New Zealand dollar supported exporters and continues to favour offshore earners heading into 2026.

Lower interest rates also shifted investor behaviour, with some households moving out of term deposits and back toward longer-term investments. This trend is likely to continue in 2026 as the economic backdrop improves. Growth is expected to recover gradually, earnings forecasts are firmer and financial conditions are now supportive rather than restrictive. 

Opportunities are likely to come from the broader parts of the market rather than the largest index names, but New Zealand shares remain a core source of income, diversification and long-term value for most investors.

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Fixed-income conditions improved significantly through 2025 as interest rates moved into clearly stimulatory territory. The sharp increases of the prior two years have now unwound, and the bond market has settled back into a more normal pattern.

Lower yields have pushed many existing bonds above par, but for most investors who hold to maturity, the more meaningful change has been the lower rates now available for new investments. The most noticeable adjustment has come through deposit rates. As older term deposits matured through 2024 and 2025, reinvestment rates stepped down sharply, narrowing the gap between cash and high-quality bonds and restoring the appeal of fixed interest within diversified portfolios.

The Reserve Bank has made it clear that the cutting cycle is effectively complete, and wholesale rates have already moved off their lows as markets adjust to a more cautious policy stance. This suggests that the major capital gains from falling yields are now behind us. From here, returns should come mainly from income rather than price movements, marking a shift back to a steadier and more typical phase of the cycle.

Investors should remain disciplined. When rates fall to low levels, the temptation is to stretch for higher yield, but this often means taking on more risk than intended. A measured approach is more appropriate at this point: focus on quality, stay diversified and be patient with reinvestment decisions.  

Looking into 2026, the backdrop for fixed interest is more stable and predictable than it has been for several years. Issuer confidence should continue to improve as conditions settle, and this may lead to a healthier flow of new deals at pricing that better reflects underlying risk. 

Bonds are again positioned to deliver steady income, credit markets are functioning well, banks are reporting low levels of impairment and the asset class has returned to its core role as a portfolio stabiliser. 

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The listed property sector was one of the stronger performers in 2025, gaining +12.75% for the year to date, well ahead of the broader market. Falling interest rates played a major part, helping stabilise valuations, ease funding pressures and lifting investor confidence. Several trusts also used the year to repair balance sheets, leaving the sector in a more workable position than it has been for some time.

Valuations now appear largely reset. The sector continues to trade at a discount to underlying asset values, and gross yields remain appealing relative to fixed interest alternatives. Dividend guidance through the most recent reporting season was steady, and although wholesale funding rates have potentially stopped falling, the refinancing of older, higher-cost debt will still deliver gradual relief through 2026.  From here, performance will depend more on rental income, occupancy and good management rather than on further shifts in interest rates. This is a healthier footing for the sector.

Residential property remains important for household confidence even though it has little direct impact on listed property returns. Prices stabilised through 2025 after one of the biggest downturns in decades and are expected to rise modestly as mortgages reprice at lower rates. Affordability, however, is still stretched, and it is difficult to justify a sharp rebound while budgets remain tight. Banks are also doing their part, lifting house price forecasts and borrower incentives.

Overall, the property sector has moved out of the worst part of the cycle. Listed property in particular now offers a clearer combination of yield, stability and improving fundamentals than it did a year ago. Residential property is no longer weighing on sentiment, even if structural affordability challenges remain. Together, these trends point to a more settled environment for 2026, with listed property well positioned to deliver income and play a steady role within diversified portfolios.

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Global sharemarkets (+21.3% YTD) delivered strong results over 2025, helped by easing interest rates, resilient earnings and improving business sentiment. A key shift has been the broadening of the rally.  

Performance is no longer concentrated solely in the large US technology companies that have dominated recent years, with healthcare, industrials and consumer services also contributing meaningfully. Several major markets outside the US performed strongly and continue to trade at more reasonable valuation levels than the US.

The US continues to be strong (S&P500 + 14.5%) but has more recently lagged the rest of the world (MSCI World ex-US +29.2% YTD). The Australian benchmark returned +8.5%, but like NZ, performance under the hood showed strength, with the Australian mid and small caps (ie outside the top 50) up +19% YTD. 

For New Zealand investors, a weaker NZ dollar amplified offshore returns. This has been a tailwind, but one that can reverse quickly. A normalisation of the NZD/USD towards levels seen in 2022, around 70 cents, would reduce the NZD value of unhedged US investments by close to 20 percent. While currency moves are difficult to predict, maintaining a mix of hedged and unhedged exposure remains a sensible way to smooth volatility.

Valuations in global markets remain elevated in parts. The technology giants appear priced for very strong future earnings, but so far those earnings have continued to justify market expectations. Beyond the US, many regions offer broader sector exposure at more moderate valuation multiples.

Australia continues to remain a useful way to complement New Zealand portfolios via the banks, resources and other sectors not available domestically.

Looking ahead, none of the risks highlighted a year ago have disappeared, but the broadening in market leadership, stronger corporate balance sheets and more reasonable valuations outside the US provide a degree of support. For most investors, retaining some diversified exposure to offshore markets continues to be one of the most effective ways to manage risk and participate in long-term growth.

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For New Zealand investors, 2025 has been challenging, but we enter 2026 on a more stable footing. The most difficult phase appears to be over, confidence is gradually returning, and financial conditions are no longer a headwind. While valuations remain elevated and could temper future returns, market leadership is broadening beyond a select few companies. This shift, alongside more resilient economic fundamentals, points to a more balanced and hopefully settled environment as we look ahead.

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Office Closure Dates

Our office will close on Friday 19 December and reopen on Wednesday 7 January. During this period we will continue to monitor urgent emails, cash management withdrawals and share transactions. If you have an urgent matter that requires a call, please email us with your phone number and we will return your call.

Chris Lee & Partners