A closer look at what 2025 holds for shares, bonds and currencies.

As we head into 2025, it’s the ideal time to look ahead at what’s shaping the investment landscape. While falling interest rates are great for the New Zealand economy, what is more important is what they will do over the long-term, a leading fund manager asserts.

Mark Riggall, Portfolio Manager at New Zealand-owned investment specialist firm Milford, says long-term interest rates have been rising in the last couple of months of 2024 because governments around the world keep spending money.

“To do this they need to borrow and that weighs on bonds because they are issuing lots of bonds to fund that spending,” he says.

“It’s great locally for the market that rates are going down, but there is a risk that if growth remains high, inflation stays sticky and governments continue spending heavily, long-term interest rates will rise.”

Riggall made his comments while offering insights into what may be ahead for investors in 2025, what they should be thinking about and looking out for. He says lower interest rates in New Zealand should be beneficial for shares.

Internationally, Riggall says the earnings expectations on the US share market are strong, especially given the policies the incoming Trump administration seems to be putting in place.

“The US has been fantastic, but it is pretty expensive, so while it can continue to rally, those high valuations temper our enthusiasm a little,” he says. “There it’s about managing exposures and focusing on sectors we think have relatively improved prospects, like financials.”

While the US market presents strong earnings expectations, other regions offer contrasting opportunities for investors. “The UK, for example, has been a focus of increasing investment for us but is a market that’s typically underappreciated and unloved,” says Riggall, noting that this is positive, as renewed interest could unlock significant upside potential. “Those catalysts are similar to what we see in New Zealand – interest rate cuts and moderating inflation,” he says.

This alignment of conditions creates a favorable environment for growth across multiple markets. “The Bank of England is expected to cut rates which should improve share valuations and support the UK economy.”

Riggall says the Australian share market has been performing well and some good returns have been harnessed there. He says the Australian market is, however, quite expensive and broadly speaking doesn’t deliver a lot of overall profits. “But we’ve got a big team on the ground there unearthing some good companies with good growth prospects, so we think we can deliver some reasonable returns.”

Riggall says currency is important and, as active managers, Milford fluctuates its positioning in currencies and can take positions that are different from where it is investing. “Currencies tend to be volatile but not trending, which provides plenty of opportunities to buy and sell effectively – and we have.

“These things don’t trend in one direction forever. The New Zealand dollar tends to strengthen toward the end of the year - so we’re mindful of that as well - and overall, we’re highly active in playing these trends and turns in the currency market.”

At the dawn of 2025, investors face a dynamic landscape shaped by falling interest rates, evolving global market trends, and sector-specific opportunities. While challenges such as high valuations and geopolitical uncertainties persist, strategic investments in undervalued markets and high-growth sectors offer pathways to strong returns.

By remaining adaptive and focusing on long-term opportunities, investors can navigate these changes with confidence and position themselves for success in the year ahead.

This article does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment, tax or financial advice. Past performance is not a reliable indicator of future performance. Investment involves risks and returns can be negative as well as positive. Milford Funds Limited is the issuer of the Milford KiwiSaver Plan and Milford Investment Funds. Please read the relevant Milford Product Disclosure Statement at milfordasset.com. Before investing you may wish to seek financial advice. The Disclosure Statements for all Milford Financial Advisers contain more information and are available on request, free of charge. See our Financial Advice Provider Disclosure Statement at milfordasset.com/getting-advice.