Key points
- Bond yields: Yields are at multi-year highs as inflation risks, heavy sovereign and corporate debt issuance, and limited investor capital push borrowing costs higher.
- Government debt: Structural deficits remain a concern. The US is supported by its reserve-currency status and resilient economy, while France, Australia and other markets face greater fiscal pressure.
- Equities: Share markets are focused on the resilience of the economy and the consumer, strong corporate profits and the AI-related growth, as opposed to bond markets that remain cautious around inflation risks.
- Investor opportunity: Higher yields make fixed income more attractive than it has been for much of the past 15–20 years.
- Politics: UK leadership changes and the US midterms are expected to have mainly short-term market impacts and the lead-up to the midterms may deliver increased volatility, however outside of oil-driven inflation, this will likely be insignificant.
- Central banks: Raising interest rates does not tame inflation driven by external factors i.e. oil, but it does risk inducing a recession, so central banks may be reluctant to tighten aggressively despite persistent inflation pressure.
- Global outlook: The US economy is comparatively resilient because of productivity growth. Australia, New Zealand, Canada, the UK and much of Europe by contrast have expanding GDP with little or no productivity growth, which creates inflation pressure.
- Resources: Energy, metals and commodities—especially copper—remain important portfolio hedges as demand from the energy transition, defence spending and AI chip manufacturing outpaces supply.
- Earnings and valuations: US earnings growth remains exceptionally strong, however valuation multiples are compressing as prices aren’t increasing to the same extent; Europe is earlier in its earnings recovery from lower multiples, hence the rally.
- Portfolio positioning: Global diversification, disciplined strategic asset allocation, being alert to opportunities and a long-term approach remain key. New Zealand exposure has been reduced further, preferring exporters and resource producers.
- Currency: The New Zealand dollar is weak, with the US dollar retaining structural strength, with periodic cycles of weakness. Commodity currencies may benefit as interest rate expectations converge.
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