Market Update

The Corporate bond market in 2025 was shaped by a clear change in direction for central banks. After several years focused on fighting inflation, policy moved decisively into an easing phase. As the year progressed, however, it became increasingly clear that the bulk of interest-rate cuts are now behind us. This shift has important implications for both global and New Zealand corporate bond investors.  

In New Zealand, the transition has been particularly pronounced. The Reserve Bank of New Zealand moved early and decisively, relative to other central banks, to support a slowing domestic economy. By late 2025, markets were largely pricing that the easing phase was close to complete. Offshore, the Federal Reserve and other major central banks followed a similar pattern: rates were no longer rising, cuts had been delivered, but expectations for further aggressive easing had faded. This matters because bonds tend to perform best during the ‘cutting phase’. Once that phase is largely over, returns rely more on income (the interest paid) rather than further price gains from falling yields.  

One of the most important, and often misunderstood, features of the corporate bond market is ‘credit spreads’. In simple terms, a credit spread is the extra return investors receive for lending to a company rather than to a government. Government bonds are considered very safe; corporate bonds pay a bit more to compensate investors for taking on some risk that the company might run into trouble. At the end of 2025, credit spreads across both global and New Zealand markets were very tight, meaning investors were receiving only a small extra return for taking on corporate risk. This is not unusual at this stage of the cycle. Company balance sheets are generally healthy, default rates are low, and investors are comfortable taking risk.  

The downside is that future returns will be more modest. When spreads are tight, there is less room for them to narrow further, and more risk that they could widen if economic conditions deteriorate. The key takeaway is simple: corporate bonds still provide income and stability, but they are not especially cheap relative to history.  

One of the more constructive developments in recent years has been the increased issuance of bonds by large global technology companies. As tech firms fund long-term investment in data centres, AI infrastructure and global networks, they have become major participants in the corporate bond market. This is a positive structural shift. Many of these companies have exceptionally strong balance sheets, large cash reserves and highly predictable cashflows. Their growing presence improves the overall quality of the global corporate bond universe, offering investors access to well-capitalised issuers without needing to take on excessive credit risk.  

With rate cuts largely complete, corporate bonds are entering a phase where income matters more than capital gains. Tight credit spreads mean returns are likely to be steady rather than spectacular, but high-quality issuers - particularly those with strong balance sheets - continue to play an important role in diversified portfolios, both in New Zealand and globally. 

The 2025 ‘school report’ for the Inflation Category is a good result in aggregate with close to double digit returns. Individually, there was a strong showing from the utility and infrastructure sectors but the property sector can do better. This pattern was evident across both the global portfolios and the New Zealand portfolios.   

After several difficult years dominated by rising interest rates and narrow equity leadership, 2025 marked an important turning point for listed real-asset sectors. Global Property, Global Infrastructure and Global Utilities all benefited from a more stable interest-rate environment, improving earnings visibility, and a broadening of equity market leadership beyond US mega-cap technology. While performance differed across sectors, the common theme was a return to fundamentals: cashflows, balance-sheet strength and long-term demand drivers.  

Property: stabilisation after a long reset.  

Listed property, both in New Zealand and globally entered 2025 still recovering from the sharp valuation correction triggered by higher interest rates in prior years. The sector’s performance reflected a gradual normalisation rather than a rapid rebound. With bond yields stabilising and, in some regions, edging lower, investor confidence improved and valuation pressure eased.  

Earnings trends were mixed but increasingly constructive. Logistics and industrial property benefited from structural demand tied to e-commerce, supply-chain resilience and data-centre expansion. Residential markets in parts of Europe and Asia showed improving fundamentals as rental growth offset higher financing costs. By contrast, office property remained the laggard, particularly in the United States, where work-from-home trends and elevated vacancy rates continued to weigh on sentiment.  

While not a high-growth story, global property in 2025 re-established itself as a cyclical stabiliser with selective opportunities rather than a blanket recovery trade.  

Infrastructure: steady compounding with selective upside. 

Global infrastructure was one of the more reliable performers of 2025. The sector’s appeal lay in its combination of inflation-linked revenues, regulated cashflows and long asset lives — attributes that regained favour as investors sought durability rather than pure growth.  

Transport assets such as toll roads and airports benefited from resilient travel demand, while regulated utilities and energy networks delivered predictable earnings growth. A notable feature of 2025 was the growing influence of structural capital expenditure cycles. Grid upgrades, renewable integration, and digital infrastructure investment (including data centres and fibre networks) supported medium-term growth expectations.  

Valuations expanded modestly as interest-rate uncertainty receded, but performance was still largely earnings-driven. Infrastructure did not capture headlines in the way technology stocks did, yet it quietly delivered attractive returns. For the Inflation Category, the sector reinforced its role as a long-term compounder and an effective diversifier against economic volatility.  

Utilities: a beneficiary of the AI and energy transition themes.  

Utilities and especially Global Utilities enjoyed renewed interest in 2025, driven by two powerful forces: the energy transition and the rapid growth in electricity demand linked to data centres and AI infrastructure. What was once viewed as a low-growth, defensive sector increasingly displayed credible growth characteristics. Many international regulated utilities benefited from higher allowed returns on capital as regulators recognised the scale of investment required to modernise grids and support electrification. Renewable generation assets also performed well, supported by long-term contracts and improving project economics as supply-chain pressures eased.  

While utilities remained sensitive to bond yields, the sector’s earnings visibility and expanding capital-expenditure pipelines helped offset valuation concerns. By year-end, utilities had reasserted their relevance not just as defensive holdings, but as essential enablers of global technological and energy change.  

Taken together, the three sectors of Property, Infrastructure and Utilities in 2025 highlighted a broader market shift toward assets with durable cashflows and long-term relevance. As investors look to 2026, these sectors appear well positioned to benefit from falling interest-rate pressure, continued global investment in infrastructure and energy systems, and a more balanced approach to equity market leadership.  

2025 was another strong year for the growth category and the third year in a row where the category in aggregate has recorded annual returns in excess of 10%. This year it was the global portfolios driving return as global share markets enjoyed a strong year as strong company earnings ultimately trumped tariff concerns.

The New Zealand and Australian Shares Portfolio was more muted as the New Zealand economy is taking far longer to return to growth than we expected and this is reflected in company earnings and in turn the return of the local share market which was up around 4%.   

Looking back at the year there are some very clear themes driving market performance but there are also other less obvious themes which are having a significant impact.   

Artificial intelligence (‘AI’) was the most obvious and discussed theme as it continued its transformative march through global markets in 2025. In 2025, AI continued to act less like a ‘sector story’ and more like a multi-year investment cycle. The obvious winners were still the enablers: chips, data-centre infrastructure, networking, power management and the software stacks that help companies deploy models at scale.

What changed through the year was the breadth of participation. Investors became more willing to pay for the second- and third-order beneficiaries of AI adoption: industrial automation, cybersecurity, and even parts of utilities and infrastructure tied to grid build-out and data-centre electricity demand. In other words, the AI theme matured from a narrow “Who has the best model?” debate into a wider “Who is selling picks and shovels — and who can translate AI into productivity?” cycle.   

In the case of the United States the strong return for the share markets was good for investors. However, we think that what mattered was how that return was generated. A large portion came from ongoing earnings and sales growth rather than a simple increase in the valuation multiple. That distinction is important heading into 2026 because markets built on earnings tend to be more durable than markets built purely on multiple expansion.  

One theme for 2025 is however less discussed and that it the quiet rotation away from US assets. After years of outperformance, American shares underperformed the major international markets. European markets benefited from energy price normalization and surprising economic resilience, while Japan’s corporate governance reforms and favorable valuations attracted renewed interest.

Chinese shares, after years of underperformance, enjoyed strong returns on signs of stabilisation amid policy support. Emerging markets broadly outperformed as commodity prices firmed and fears of aggressive Federal Reserve tightening receded.  

This rebalancing manifested most clearly in currency and alternative asset markets. The US dollar declined notably against major currencies, reflecting concerns about fiscal sustainability, narrowing interest rate differentials. Gold’s stellar performance—often viewed as a barometer of currency confidence—reinforced this narrative, as central banks accelerated reserve diversification and investors sought inflation protection amid persistent price pressures.  

Put simply: 2025 rewarded investors who were globally diversified - your portfolio with NZ Funds is globally diversified.