Commentary on the 2024 year by Russell Investments, UniSaver’s investment manager and consultant

Another year of solid returns for UniSaver investors

Global markets

Despite the tightest U.S. Federal Reserve (Fed) policy since the early 2000s and a deeply inverted Treasury yield curve, the U.S. economy defied expectations in 2024 with above-trend GDP growth, robust job creation, a 25% surge in the S&P 500 Index, and double-digit earnings growth.

Global share markets made strong gains over the past 12 months, returning 32.8%^[1] in local currency terms. In hedged New Zealand dollar (NZD) terms, stocks returned 20.5%^[2].

Share markets began the year positively, with stocks continuing to be influenced in large part by the outlook for global interest rates. Stocks made further, albeit modest gains in the second quarter; much of which continued to be driven by central bank activity. In the US, the Fed again left its benchmark fed funds rate on hold at a target range of between 5.25% and 5.50% throughout the quarter. Speaking after the Bank’s June gathering, Chair Jerome Powell said that while inflation had eased considerably from its peak, it nonetheless remained too high, and that policymakers didn’t yet have the confidence to begin lowering interest rates.

Global share markets made further gains in the third quarter. Performance was again influenced in large part by global central bank activity; notably in the US.  Powell said the decision to cut rates by 0.50% didn’t imply that the inflation fight was over, but rather that officials had growing confidence it was time for a recalibration of the Bank’s policy stance. The bigger move added to optimism the US economy can achieve a ‘soft landing’, whereby the Fed tames inflation without triggering an economic downturn. Elsewhere, both the Bank of England (BoE) and the European Central Bank (ECB) cut interest rates in the third quarter.

Share markets ended the year well, rising through the fourth quarter on the back of strong US market gains. US stocks rose strongly in the wake of Donald Trump’s decisive victory in the country’s presidential election. Trump’s proposed policies, including promises of lower taxes and less corporate regulation, are generally considered to be more growth friendly. In saying that, Trump’s win did raise concerns that his pro-growth policies, together with the threat of tariffs, could stoke inflation and impact the pace of US interest rate cuts. For its part, the Fed cut interest rates twice over the period, taking its benchmark fed funds rate to a target range of between 4.25% and 4.50%. The last time US interest rates were at this level was back in December 2022. However, the Fed also signalled that it now expects to cut interest rates just twice in 2025; two less than it projected in September.

New Zealand shares

The New Zealand share market also performed well in the fourth quarter, returning 5.6%, and admirably for the year, returning 12.2%^[3].  Stocks benefited from the Reserve Bank of New Zealand (RBNZ)’s decision to cut its official cash rate by 0.50% at each of its October and November meetings. Inflation in New Zealand is now close to the midpoint of the RBNZ’s 1-3% target range, while economic growth and the labour market remain weak. The local economy shrank 1.0% in the three months to 30 September, which followed the 1.1% contraction we saw in the June quarter. Officials expect economic growth to recover in 2025 as lower interest rates spur investment and spending, though employment growth isn’t likely to pick up until midway through the year. Importantly, the Bank left the door open for more rate cuts in the near term. Stocks also benefited from Trump’s election win in November and signs of a recovery in domestic company earnings. Limiting the local market’s gains was the Fed’s hawkish pivot toward the end of the period and disappointing growth in China, New Zealand’s largest trading partner. At the sector level, information technology, energy and industrials recorded very strong gains over the period, while materials, consumer staples and real estate were all weaker. 

New Zealand fixed income

The New Zealand bond market performed modestly over the final quarter, returning 0.7%, and performed well over the full year, returning 5.7%. 

Domestic long-term government bond yields rose (in aggregate) throughout the quarter; though not as much as their global counterparts after the RBNZ cut interest rates in October and November. The yield on New Zealand 10-year government debt closed the year at 4.41%. Local credit markets were flat for the quarter, with spreads unchanged over the period.

How did markets affect UniSaver’s investment options?

Over the last year the Conservative, Balanced and Growth options have returned 5.3%, 10.6% and 14.4% respectively, after the deduction of fees and tax. 

Over the last ten years the Conservative, Balanced and Growth options have returned 3.3%, 5.5% and 7.1% per annum respectively, after the deduction of fees and tax. 

Looking ahead

2025 will be another year of overcoming challenges and redefining limits against a backdrop of high US equity market valuations, mega-cap dominance, and the uncertainty surrounding the policy agenda of President Trump. 

Looking into 2025, we anticipate a soft landing for the US economy. Our assumption is that the new administration will ease its more aggressive stances on tariffs and immigration. With these dynamics in mind, here are our key economic views for 2025:

1. US growth and policy trade-offs 

The US economy is expected to grow at a trend-like pace of 2.0% in 2025 in response to the lagged impact of tight Fed monetary policy. Core personal consumption expenditures (PCE) inflation is projected to move closer to the Fed’s 2% target, while the central bank eases rates gradually, with the fed funds rate likely to reach 3.25% by year-end—aligning with its neutral level.

The Trump administration’s policies present a delicate balancing act [external link]. Tax reforms and deregulation are likely to stimulate growth, particularly in domestic and cyclical sectors. Tariffs and immigration restrictions, however, could trigger a stagflationary shock that might have the Fed contemplating a rate hike as the economy weakens.

Our working assumption is that the new administration will not aggressively pursue policies that create inflation risk. One clear message from the election is that US voters were unhappy with the inflation of the Biden years. Tariffs and immigration controls are likely to be implemented, but their extent will be constrained by the inflation outlook. On balance, we see the policy mix as supportive for business confidence, which is likely to drive a resurgence in capital markets and provide positive tailwinds for private assets.

2. Global headwinds and policy divergences

Outside the US, growth will likely remain under pressure. Trade policy uncertainty and tariffs will weigh heavily on Europe. The ECB is likely to cut its deposit rate to 1.5% by year-end to offset the tariff impact and the continued stagnation of the German economy.

The UK faces sluggish productivity growth, labour constraints, and inflationary impacts from higher taxes under the new Labour government. The BoE’s capacity to ease is constrained, with the base rate likely to decline only modestly to 3.75%–4.0%.

Japan remains an outlier, supported by a virtuous wage-price spiral that will anchor inflation expectations near 2%, allowing the Bank of Japan to further normalise policy. Rates could rise to a 30-year high of 0.75% by year-end.

China faces headwinds from the property market collapse, deflation pressures, and US tariffs. The policy response continues to be reactionary, rather than one where proactive steps are taken to solve structural problems such as high savings and low household consumption. There are downside risks to consensus expectations for 4.5% GDP (gross domestic product) growth in 2025.

3. Market sentiment and valuations

Three defining features of the market outlook for 2025 are the elevated level of the S&P 500 forward P/E (price-to-earnings) ratio at 22x, the potential for further US dollar strength, and the direction of the US 10-year Treasury yield.

In New Zealand, easing monetary policy is improving the outlook. Risks include China-related exposure and trade surplus, though we expect the Reserve Bank of New Zealand to cut rates more aggressively than the Reserve Bank of Australia. 

[1] Global shares measured by the MSCI ACWI MSCI ACWI Index – Net
[2] Global shares measured by the MSCI ACWI MSCI ACWI Index – Net NZD Hedged
[3] New Zealand shares measured by S&P/NZX 50 Gross Index (including imputation credits)