Equity markets were positive again in December. However, the source of returns was different, Europe (driven by financials), and Emerging Markets. North Asia returns were particularly strong, anchored by technology and AI related themes, and companies with significant exposure to semiconductors, hardware, and data-centre infrastructure. Most other markets were flat. A number of factors drove the breakaway from US marker dominance. This included a weaker US dollar, attractive valuations outside the US and a rotation by some investors away from US technology stocks.

In Japan, Sanae Takaichi’s election as prime minister and the formation of a coalition government between the Liberal Democratic Party and the Japan Innovation Party were interpreted as signs of greater stability and more proactive fiscal stimulus.

Closer to home, the Australian equity market was quite strong in December, notably the large cap stocks, and in particular the resource stocks and banks. IT and Healthcare were the big underperformers (as they have been all year). In New Zealand the large cap stocks were flat while the mid cap stocks performed well, up around 0.6%. Over the year the smaller cap stocks in NZ have done substantially better than the top 20.

Fixed interest markets were negative for the second month in a row, as long-dated bond yields start to rise. While a 25-basis point cut by the Bank of England was positive for UK gilts, returns were muted in US Treasuries, and in Japan government bonds experienced a significant selloff, with yields rising to multi-decade highs. New Zealand longer-dated bond yields also rose during December.

The year has been another very good one, both for equity markets and bond markets. The US market is up by 15% for the year (the third successive year in a row). The US market in 2025 has been powered by mega-cap strength and unrelenting AI-related optimism. The desire for Fed rate cuts has also propelled the rally in mid to small-caps. Communication Services and IT companies led the way in 2025, while Real Estate was the only negative sector. However, we also had Europe and Asia join the party in 2025. Europe was up over 20% for the year (led by the UK, with strong support from Germany, Switzerland and Spain). In Asia, Korea returned 85%, Hong Kong & Taiwan both 30% (all led by technology, semiconductors, and Communication services), and Japan 25%. In Australia we have also seen returns of over 10% for the last three years. NZ, in contrast has been quite disappointing, up only 3% for the year.

Central banks globally have run a controlled easing of interest rates throughout the year, balancing this against the possibility of rising inflation. This, along with gains from corporate credit bonds, has translated into fixed interest funds returning around 1-2% above cash rates for the year. Bucking the trend was Japanese bonds. Yields here rose 2% for the year, delivering a negative return for the bond market.

As we look ahead to 2026, we see further opportunities within the digitalisation megatrend. Artificial Intelligence (AI) should continue to lead innovation as well as drive efficiencies within businesses. We see the semiconductor chip manufacturers and smart infrastructure like data centres, networking & cloud hyperscalers, as key benefactors of this megatrend in 2026. We see energy transition and decarbonisation continue to be a key change in 2026 and we are also hoping that the advancement in healthcare innovation drives higher share prices of leading companies in this field.

Like November, December also saw volatile markets and prices, but flat returns for the models. Small gains from the global and Australian assets were offset from small losses in the domestic assets and fixed interest. This translated to about 0.4% for the more Aggressive models, down to a slight negative for the Conservative ones.

Year to date the strong run in global equities from May to October has meant the more aggressive models, ie 100/0 and 80/20 are up around 10-12%. Even the conservative models like 30/70 and 40/60 are up around 6-7%. This is around 3-4% above current term deposit rates.

There have been no changes to the portfolios underlying holdings over the quarter.