Global equities produced another year of double-digit returns in 2025, with the AI theme continuing to be a key driver of these returns. Quite a lot has happened in financial markets since the start of this year. While bond yields have traded a fairly narrow range, equities and commodities have been volatile. Geopolitics and concerns about AI have once again had an outsized impact on markets.    

There have been a number of political developments that have impacted markets. Specifically, there’s been the US capture of the Venezuelan leader Nicolas Maduro, followed by President Trump saying the US needs to acquire Greenland for national security reasons. There’s also been unrest in Iran, with Trump urging protesters to continue demonstrating and repeatedly saying that “help is on its way”. Additionally, the US Department of Justice launched a criminal investigation into Federal Reserve (Fed) Chair Jerome Powell.

Later in January, Trump announced he had reached a “framework of a future deal” with NATO concerning Greenland, softening earlier rhetoric and withdrawing the threat of immediate tariffs on European allies. The shift in tone brought a degree of stability to markets that had been rattled by earlier tariff threats. In early February, Trump announced former Fed governor Kevin Warsh as his pick for the next Fed Chair. Warsh is viewed as a credible choice with an institutional pedigree, and his appointment hopefully removes some concern about the Fed’s independence over the longer term.   

Away from Washington, India and the European Union announced a landmark free trade agreement, dubbed the “mother of all deals”. After almost two decades of negotiation, it aims to phase tariffs to zero on most goods traded between the blocs and is widely seen as a hedge against volatile US trade policy.

A lot of the volatility we’ve seen in equity markets has been driven by the AI theme, with exaggerated moves on both positive and negative news flow. On the positive side of the ledger, for example, worker productivity in the US grew at its fastest pace in two years during the third quarter of last year, implying that firms are successfully utilising AI and doing more with less. And on the negative side, there has recently been a big sell-off in software companies on concerns that the use of AI agents, who can perform certain tasks significantly quicker than humans, may lead to firms purchasing fewer software licenses. If one AI agent can handle the data entry, reporting, or research tasks of five employees, a company only needs one software license instead of five.
 
Here in New Zealand, our economy seems to have turned a corner after a challenging period. Following the Reserve Bank of New Zealand taking the Official Cash Rate to a cycle low of 2.25% in November, there has been a run of positive economic data. For example, retail sales data for Q3 was very strong, rising 1.9% versus the 0.6% expected by economists. Also, GDP (gross domestic product) expanded 1.1% in Q3 following a 1.0% contraction in the prior quarter. This rebound was broad-based, with 14 of 16 industries recording increases, led by construction and manufacturing.

The first major domestic data release of the new year was the Quarterly Survey of Business Opinion, which suggested the recovery is gaining momentum. Activity indicators improved, while measures of investment and employment also showed signs of strength. Interestingly, a net 25% of businesses indicated that they intend to raise selling prices, and there was also evidence of the labour market tightening. The economic recovery provides a constructive backdrop for our equity market in 2026.