Isbister Partners New Zealand

What might the markets look like this year?

What might the markets look like this year?

Welcome to 2025 and another era of Donald Trump.  After a number of pardon me and pardon yous from both Trump and Biden, it felt like half of the country left prison. 

What will it look like for financial markets with Trump being in power? 

Trump has promised to tighten border controls and penalise companies that don’t produce their goods in the US through tariffs.  I understand industry representatives from NZ are over there at the moment lobbying the US government not to impose tariffs on NZ products as we can’t grow our wonderful grapes over there and you really like our wine don’t you?  New Zealand may not feel the full impact of tariffs like some countries will.  Trump is ideally wanting manufacturing companies to shift their plants to the US to create jobs.

The US economy has been going well and according to Bloomberg and BNZ GDP is expected to grow at 2%.

As a result, the US may not need to cut interest rates as much as they expected.  However, New Zealand is not looking as good, and more interest cuts are expected as a result.  This is why the NZ dollar touched a 15 year low.  This is great for exporters but not for NZ consumers of overseas products.  Inflation released today was at 2.2% for the December quarter.  It may mean we see local inflation tick up for the first quarter in 2025.

So, it seems, US rates may take a hold position while NZ needs to take a knife to the Official Cash Rate.  NZ unemployment is expected to peak in 2025 at about 5.5% and Seek posted jobs has seen the largest drop since 2006 (outside the COVID pandemic).  Source ASB Economic Forecast Update December 2024.
 
How does that play out for you as a mortgage holder?  It’s expected that there will be a cut of .50% off the OCR next month and a further .50% in the first half of this year before interest rates settle.  So going short term is still a good strategy however review that in the middle of the year.  It may be time to start hedging (offsetting a short term rate against a slightly longer term rate) as well.  At the moment it seems worth taking a higher price for short term (6 months) not the floating rate.  If rates are going to plateau, there’s a .60% margin to be gained at some point by going out to 2 years.

For investors, the US economy looks positive.  Some of the price to earnings ratios on tech stocks are high.  This means they may be overvalued.  Trump is set to reduce regulation and compliance costs for companies and there are some attractive valuations out there for smaller companies that could benefit from this. 

As for bonds, in the US we were expecting interest rate cuts that could lead to the increase in the value of bonds.  These may be slower or even put on ice if Trumps changes are inflationary.  However, NZ and Europe still need to cut and so we could see bond prices increase in these zones.

So, 2025 could be a volatile year for markets with some expected to perform better than others.

As long as you are invested in a well-diversified portfolio, across the globe, with active tilts towards known factor premiums, then you should pick up performance wherever it comes from.



Disclaimer:  This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia.  Please don’t take this as personalised financial advice.  Discuss your situation with an Advisor.  This is where I need to say past returns are no guarantee of future returns. 

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