Equity markets started the year well. The US market rotated away from the mega-cap technology stocks, with the smaller cap stocks driving most of the market gains. Energy was the leading sector, along with precious metals like gold and silver. Financials, Technology and Healthcare lagged. The shift is attributed to an improving economic outlook and a catch-up trade, as expensive mega-cap technology valuations prompt a rotation into more traditional, domestically focused companies that will benefit from lower interest rates and trade at more attractive valuations. Outside the US, equity markets were particularly strong, with emerging markets in particular returning close to 9% in local currency for January.

However, a lot of this performance was nullified by a strong NZ dollar, up over 5% against the US and close to 4% the Euro.

The NZ equity market showed a mix of performance. The index itself was down around 1%, dragged down by A2 Milk, several of the Healthcare/retirement stocks, property stocks and technology stocks. However, the smaller cap stocks rose over 4%. The Australian market was much stronger, up close to 2%, on the back of Energy, Materials and Healthcare stocks. Technology was the big loser in January in Australia.

Bonds produced modest gains despite rising Treasury yields, particularly in the corporate space as credit spreads tightened. US Treasury yields rose in anticipation that the Federal Reserve would pause its rate-cutting cycle. And by late January we did see the Federal Reserve held interest rates steady, ending a streak of three consecutive 0.25% cuts in late 2025. The shift was driven by better-than-expected economic data and signs of stabilisation in the labour market. NZ inflation has edged above Reserve Bank’s target band but is still expected to ease over 2026.

January saw relatively flat returns for all risk profiles. Global assets outperformed domestic ones, although a strong NZ dollar offset most of the global equity return over the month.

The Portfolios continue to hold about 3/4^th of its equity exposure offshore, of which half of that is hedged back to the NZ dollar (in fact the DIMS PIE series is now closer to 60% hedged back). This preference in global stocks has been beneficial for the portfolios in 2025 and continues to follow that trend in 2026.

Dimensional has been increasing its duration in the 2-Year PIE. This means the portfolio exposure to duration is now closer to the market, and the fund is picking up the slightly higher interest rates from longer-dated bonds.