Staying the course in a volatile environment
The first quarter of 2025 proved to be a particularly turbulent period for global markets. The S&P 500 registered its' steepest quarterly decline since 2022, as investor sentiment turned decisively risk-off. Concerns about stagflation—an environment of slow growth and elevated inflation—began to dominate the narrative.
In the United States, heightened uncertainty around tariff policy weighed on growth expectations and stirred fresh inflation concerns. These fears culminated in a sharp pullback in equity markets, particularly toward the end of the quarter. Adding to this pressure was the release of DeepSeek’s new AI model, which cast doubt on the narrative of sustained US tech dominance. This triggered a significant re-evaluation of US Big Tech valuations, with the so-called Magnificent 7 entering bear market territory by quarter-end.
Meanwhile, Europe marked a notable shift in fiscal policy, with a clear pivot toward increased defence spending. This shift, combined with weaker US performance, resulted in the largest quarterly performance gap between European and American equity indices in over a decade.
Closer to home, economic data in New Zealand painted a mixed picture. The unemployment rate rose to 5.1%, reflecting some ongoing softness in the labour market. However, there were also signs of underlying resilience. The Quarterly Survey of Business Opinion indicated an increase in business optimism—a positive signal for the domestic growth outlook. While a stronger-than-expected Q4 GDP result initially buoyed confidence, broader concerns around global growth began to weigh on sentiment towards the end of the quarter.
Central banks continued to diverge in their policy paths. The Federal Reserve held rates steady, while the European Central Bank delivered two 25 basis point rate cuts in January and March. In contrast, the Bank of Japan raised rates and signalled more tightening to come. The RBNZ delivered its' anticipated 50 basis points OCR cut.
Against this backdrop, emerging market equities outpaced developed markets, with China delivering particularly strong returns. Value stocks outperformed growth, and small-cap stocks lagged due to rising concerns about trade-related headwinds. In fixed income markets, US Treasuries returned 2.9% as recession risk came to the fore. However, European bond markets struggled—German Bunds declined 1.6% on expectations of increased fiscal issuance. Japanese government bonds were the weakest performer, down 2.4%, as inflationary signals grew more persistent.
Looking Ahead
While the start of 2025 has tested investor resolve, it also underscores the importance of diversification and long-term discipline. Volatility, while uncomfortable, often creates opportunity for those able to stay the course.
At Aurora Capital, we remain focused on steering through these conditions with care, discipline, and a steadfast commitment to your financial goals. If you would like to discuss how your portfolio is positioned in the current environment, please reach out to your adviser or contact our Client Care team.
DISCLAIMER
This information is provided in a general nature only and should not be construed as or relied on as financial advice. This is not a recommendation to invest in a particular financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any investment decisions.
Past performance is not a reliable indicator of future performance. The value of your investment may go up and down.