Taking Stock, 2 April 2026

Fraser Hunter writes:

ENTERING 2026, there were genuine reasons to feel better about New Zealand. Interest rates had fallen materially from their highs. GDP had grown in both the September and December 2025 quarters – modestly, but in the right direction. The Reserve Bank held the OCR at 2.25% in February and acknowledged that earlier easing was starting to support activity.

In February, locally listed companies delivered their strongest reporting season in three years, with earnings successes outweighing misses for the first time since 2023. Consumer confidence in January hit its highest reading since August 2021, at 107.2.

The recovery was uneven and not yet self-sustaining, but for the first time in a while the evidence was pointing in the right direction.

Then conflict in the Middle East widened, oil surged, trade tensions returned, and global markets repriced sharply. None of that was in anybody’s forecast for the quarter.

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THE quarter’s disruption came from several directions at once, which is part of what made it difficult to navigate.

The most significant was energy. The temporary closure of the Strait of Hormuz drove Brent crude to around US$120 a barrel at its peak, its steepest monthly surge since the Gulf crisis.

While NZ’s distance from conflict provides some comfort, it’s the type of shock that matters. A growth scare and an inflationary supply shock are different animals. Markets have been more willing to look through growth scares, with falling demand eventually bringing inflation down and clearing the way for rate cuts. An oil-driven shock does the opposite, raising prices at the same time as it weakens confidence and spending power. It is much harder for central banks to cut their way through that.

Trade provided a further layer of uncertainty. Following the US Supreme Court’s February ruling against the initial tariffs, the US launched fresh trade probes in March targeting major partners. China is reciprocating in kind, though neither side moved to full escalation by the end of quarter. The trajectory however signals slower global trade and higher costs, and that kind of uncertainty is particularly challenging for smaller, trade-dependent economies like New Zealand.

Bonds offered no shelter either. New Zealand swap rates rose 40 to 55 basis points in March alone, sending the corporate bond index down -1.4% for the month and the government bond index down nearly -2%.

Gold, which continued its stellar run into late January, pulled back sharply in March as the inflationary nature of the shock reminded markets that gold pays no income and tends to struggle when real yields are rising.

The assumption that lower interest rates would paper over a lot of problems has already come under real pressure.

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THE domestic economy told a reasonable story through most of the quarter. Export commodity prices held up, with the ANZ commodity price index rising more than 4% month-on-month in February and meat prices near record highs. The reporting season was genuinely good. The domestic story was delivering. It was simply overtaken by a global one that few had written into their base case.

But by March the mood had turned. The NZX50 fell -6.7% in March and finished the quarter down -6.1%. Those with fuel exposure were hit the hardest. Auckland Airport dropped -13%. Mainfreight fell -10% and Freightways dropped -14.5%.

Air New Zealand was the worst performer, off more than -22% after suspending guidance and cutting flights as jet fuel costs surged. Only nine stocks on the NZX50 posted a positive return for the month.

Consumer confidence fell, unwinding the last six months’ recovery in sentiment. Business confidence more so. Households were squeezed at the fuel pump and inflation expectations returned. The major banks are now projecting inflation to return to above 4%, which will make the Reserve Bank’s job considerably harder. The RBNZ has acknowledged that the conflict could both stoke inflation and weaken growth momentum, a combination that leaves very little room to move.

Offshore was not much better, though New Zealand underperformed most peers. The S&P 500 fell -5.0% in March and -4.3% for the quarter. The ASX dropped -7.1% in March but held up better over the full three months, down just -1.6%. The MSCI World index lost -3.6% over the quarter.

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EARLIER in my career I was part of an annual client strategy piece that leaned heavily into the “green shoots” metaphor, complete with the plant growing through cracked earth stock photo. The economy was showing signs of life coming out of the GFC, the Rugby World Cup was just around the corner and the listed market outlook was improving. 2010 proved to be a false dawn, largely because of the Christchurch earthquake, again a scenario nobody had planned.

The decade that followed told a different story. The insurance rebuild mattered. Sentiment recovered. The NZ market went on to become one of the stronger performers in the developed world. The clichéd green shoots were real. They just took longer to establish than expected, and the early stage of the recovery was the least comfortable part of it.

The same metaphor popped up again entering 2026, and the first quarter has looked like another head fake, again largely due to factors outside our control. The world is more fractured now than it was post-GFC, and the bear case grows the longer the conflict in the Middle East drags on.

But the pattern is still worth noting. The early stage of a real recovery and the early stage of a false one can look almost identical from the inside, particularly when they are interrupted by shocks that have nothing to do with the underlying domestic picture. The discomfort of this quarter is not, by itself, evidence that the thesis was wrong.

In my own case, I’ve been thinking about a range of outcomes from here in three buckets: an ideal scenario, where the conflict is contained and the domestic recovery continues broadly on track; a compromised one, where some combination of higher energy costs, sticky inflation and delayed rate relief persists for longer than markets hope; and a very much not ideal scenario, where things deteriorate to the point that a much higher allocation to cash and fixed income becomes necessary.

A meaningful cash reserve is important, not because I think the worst case is certain, but to prevent being forced to sell good securities at bad prices. Forced selling is the most reliable way to destroy long-term returns. Holding cash that earns a modest return while you wait for clarity isn’t glamorous. But it’s disciplined, and it keeps your options open when others are running out of them.

The optimal scenario doesn’t require dramatic action; it requires a careful review of what you hold and whether it still makes sense at current prices. The compromised scenario, which I suspect is where we’re most likely to spend the next few months, calls for a portfolio that reflects your stage of life, your tolerance for volatility, and your willingness to accept that market returns won’t be a straight line.

The adverse scenario is worth planning for, not because it’s probable, but because the cost of being unprepared is high.

At the very least, these are conversations you should have with yourself, if not with your adviser.

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THE domestic fundamentals have not yet changed. Companies are delivering. Commodity prices are holding. Lower rates are still working through the system. The risk worth watching is a prolonged conflict that keeps energy prices elevated, delays rate relief further and tests business and consumer confidence beyond what the recovery can absorb. That is a genuine risk, not a remote one. But it is the bear case, not the base case, and positioning as though it is certain comes with its own costs.

Recoveries are rarely comfortable in their early stages. The evidence comes before the confidence does, and the confidence comes before it feels obvious. This quarter tested that assumption harder than most. It has not changed it.

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Property For Industry

Property For Industry has set its interest rate for its 6.5- year Senior bond at 5.35% and is fully allocated. Thank you to those who participated in this issue.

Local Government Funding Agency

LGFA has set its interest for its 8-year bond at 4.75%. These bonds are AAA rated by S&P and mature on the 15th of May 2034. Clients interested in this bond are welcome to contact us, as we have a small supply remaining.

Travel

13 April – Taupo – Johnny Lee

14 April – Hamilton – Johnny Lee

15 April – Tauranga – Johnny Lee

16 April – Lower Hutt – David Colman

17 April – Napier – Johnny Lee

Chris Lee & Partners Ltd