Markets kept moving despite an uncertain quarter

There was plenty happening in markets in the quarter ended 30 September. Conflict in the Middle East intensified again, oil prices rose above US$100 a barrel and interest rates moved higher.

Despite the uncertainty, share markets generally moved higher.

Earnings and AI investment supported US shares

US shares were among the stronger performers, supported by company earnings and continued investment in artificial intelligence. Some of the world’s largest technology companies are investing heavily in AI infrastructure, contributing to one of the biggest corporate investment cycles seen in decades.

Elsewhere, results were mixed. New Zealand, Australian and European shares made modest gains, while Japan's Nikkei index fell over the quarter. Emerging markets were also mixed, but remain one of the strongest-performing major asset classes over the past year.

New Zealand interest rates rose

Closer to home, the Reserve Bank increased the Official Cash Rate twice during the quarter, taking it to 2.75%.

Higher interest rates are increasing borrowing costs for households, but the New Zealand economy has remained resilient, supported by exports, tourism and stronger-than-expected economic growth.

We expect interest rates will need to rise further, although probably not as much as financial markets currently anticipate. Our base case is for the OCR to settle between 3.5% and 3.75% over the coming years.

Higher yields reshaped the picture for bonds

Bond yields rose in New Zealand and overseas as investors weighed concerns about inflation, higher oil prices and stronger economic growth.

Bond yields and prices generally move in opposite directions. So, as yields rose, the value of existing bonds fell, contributing to negative returns across most fixed interest markets over the quarter.

Higher yields have another effect too: they increase the income available from newly issued bonds. After years of very low yields, that has changed the role bonds can play for investors looking for income.

Investing for income: Bonds are back in focus

Bonds can generate returns in two ways: through the regular income they pay and through changes in their value.

They can also behave differently from shares, which is one reason they are commonly used alongside other investments in a diversified portfolio.

Shares and bonds play different roles. Shares can provide long-term growth, while bonds can provide income and another source of returns within a diversified portfolio.

Bonds are not risk free, however. Their value can change as interest rates move, and returns can also be affected by factors such as the length of time until a bond matures and the creditworthiness of its issuer.

For investors who want exposure to fixed interest through an ETF, Smart offers a range of options, including the Smart Global Bond ETF, Smart Global Aggregate Bond ETF, Smart NZ Bond ETF and Smart NZ Cash ETF.

Explore Smart fixed interest ETFs

What can investors take from the quarter?

Markets rarely move together or in a straight line. This quarter was a good example: shares generally rose, while bonds, property and infrastructure had a more difficult time.

That's why diversification matters. Rather than relying on one market or type of investment, spreading investments across different markets and asset classes can help reduce reliance on any one of them.

Periods like this are a useful reminder of the principles that underpin our approach:

Time in the market, broad diversification, and the fees you don't pay.

This commentary is provided for general information purposes only and does not constitute personalised financial advice. Investors should consider their own circumstances and seek professional advice where appropriate. Smartshares Limited (Smart) is the issuer and manager of the Smart Exchange Traded Funds. The latest product disclosure statements for the Smart Exchange Traded Funds are available here.