Six predictions for 2025

Financial markets are difficult to predict, especially over short timeframes, and in investing terms 12 months is extremely short.

I don’t have a lot of faith in forecasts, predictions or targets, so it’s a bit hypocritical of me to be offering them.

However, I have equally little time for analysts that sit firmly on the fence, afraid to take a view.

So I’m happy to have a go, although I’m sure I’ll be wrong (by at least some degree).

Trying to come up with a few market predictions for the year ahead focuses the mind, at least, so here are my six for 2025.

1. The economy drags itself out of recession more quickly than expected

New Zealand has been in recession for two years, on a per capita basis, but there’s light at the end of the tunnel.

Fresh GDP growth figures are due next week and I suspect they’ll still look ugly.

However, early next year things should pick up.

Borrowers have opted for shorter-mortgage terms this year so it won’t be long before lower interest rates ease the pressure on household budgets.

We’re headed for the highest ever dairy payout, which will boost activity in many regions, while business confidence also points to better times ahead.

Watch for a marked change in tone during the February reporting season, as companies start to see evidence of an improving backdrop.

2. Interest rates fall further, but not as much as some hope

We’ve seen two 50 basis point cuts in the Official Cash Rate, and another in February will make it three in a row.

That’ll take the policy rate to 3.75 per cent, at which point the Reserve Bank will revert to smaller moves.

That’ll be good for the borrowers, consumers and the economy overall.

However, most of the fall in mortgage rates is already behind us and the popular one- and two-year rates will likely remain in the fives.

3. House prices recover, but don’t boom

House prices have been flat for two years and are still more than 15 per cent below their 2021 peak.

Lower interest rates and improving demand will ensure values are on the up in 2025, although homeowners shouldn’t expect another major boom.

In the three years leading up to the pandemic the OCR was below two per cent, but it’s very unlikely to go that low this time around.

Housing affordability is also extremely low, with prices are still some 25 per cent above pre-COVID levels (despite the falls we’ve seen since 2021).

Since 1990, house prices have increased 5.9 per cent annually, and homeowners should expect a growth rate closer to that next year and into 2026.

4. New Zealand shares and fixed income are set for further solid gains

I’m optimistic about the prospects for the local market in 2025.

The NZX 50 is up about nine per cent so far this year, in line with the long-term average and putting the market on track for its strongest gain in four years.

I think there’s more to come next year as the economy recovers, corporate earnings grow and investor sentiment improves.

After been at six per cent earlier in the year, term deposit rates have already dropped to five per cent and are likely to keep falling.

With the market offering a gross dividend yield of 4.5 per cent, investors will enjoy a double-digit total return next year if we see some modest capital growth from our listed businesses.

5. The currency remains soft against a buoyant greenback

At US$0.58, the NZ dollar is more than ten per cent below its long-term average of US$0.66 against the US dollar.

Most of the bank economists see it back in the 60s next year, but I wouldn’t be surprised if it remains weak.

With the US economy looking stronger than most and the Federal Reserve likely to tread more carefully with its interest rate cuts, the greenback could remain well supported.

Throw in some policy changes designed to benefit America at the expense of others (notably China, New Zealand’s biggest export market) and you have a recipe for sustained weakness in the kiwi.

6. US shares are more volatile, but ultimately have another up year

This is perhaps the toughest call to make.

While New Zealand share prices remain 15 per cent below their 2021 highs, major indices in the US, UK, Europe, Japan and Australia have all hit new records during 2024.

The US has led the charge, with the S&P 500 up 28 per cent this year after registering a 24 per cent gain in 2023.

After such a stellar run it looks highly priced on some measures, but that doesn’t mean we won’t see another solid performance in 2025.

Analysts expect earnings growth of 15 per cent next year, and even if you shave a bit off that to account for their typical overenthusiasm, you’ll still have a healthy improvement.

The macro backdrop is also a friendly one.

Inflation has been tamed, interest rates are headed lower and the incoming administration will take a pro-growth, business friendly approach.

Don’t expect a third consecutive 20 per cent plus year, but if a recession has indeed been avoided then the market will be up again in 2025.

Expect many more ups and downs as investors grapple with the threat of tariffs, and watch for some of the sectors that’ve lagged the high-flyers to do more of the heavy lifting.

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