OCR hiking cycle will have begun
The Official Cash Rate (OCR) was cut from 4.25% to 2.25% last year. That sees it well down from the 15-year high of 5.50% that prevailed in 2023 and 2024.
It’s now firmly in stimulatory territory, which will take some pressure off borrowers and help the economy recover.
All going to plan, this is the bottom right here and the next move will be up.
The Reserve Bank has been at pains to point out there’s no rush, although markets are pricing hikes in the second half of this year.
That’s not at all outlandish if things pick up as expected, and, at the very least, we’ll be talking about looming hikes by then.
We’ve seen the Reserve Bank change tack more than once in recent years, so why wouldn’t they again?
Local sharemarket will have its best year in five
If it’s not the best year in five, I’m confident it’ll be the second best.
Since 2020, the NZX 50 index has had two down years, two where the market rose about 3%, and one good year with an 11.4% gain (that was 2024).
We should be able to beat at least four of those, given the set-up heading into 2026.
Borrowing costs are down, business confidence is up and the economy has dragged itself out of recession.
The labour market will improve and corporate earnings should follow our economic fundamentals higher.
With the market offering a very reasonable gross dividend yield of about 4%, we could go close to a double-digit total return if we see some modest capital growth from our listed businesses.
I would’ve said the same thing 12 months ago and been dead wrong, so hopefully 2026 is different.
For reference, the 30-year average is a return of 8.5% per annum.
House prices will rise, but only modestly
The only asset class more disappointing than the local sharemarket in recent years has been the New Zealand housing market.
Prices have been flat for three years and are still 15% below their 2021 peak.
Property investment is hard yakka when there are no capital gains to speak of, as those insurance, rates, maintenance and interest bills all still bite.
Sharply lower mortgage rates and rising sentiment should ensure values rise in 2026, making now a good time to buy.
However, homeowners and investors should keep their feet on the ground.
In the years leading up to the pandemic the OCR was below 2%, and we’re unlikely to see those levels again any time soon.
Affordability remains low for many people, while the prospect of policy change still hangs over us.
Since 1990, house prices have increased just below 6% annually, and I think homeowners should bank on a growth rate in the 4-6% zone.
US will remain in the driver’s seat
It’s hard to bet against America in 2026, so I won’t.
This is another prediction that could fall flat, as is often the case when investors are universally bullish about current trends remaining in place.
However, America’s economic fundamentals look good with growth intact, inflation contained and the Federal Reserve having room to reduce interest rates further.
Unless one sees a recession ahead (and I don’t), that is typically a recipe for solid returns.
We can point to overheated valuations in places, but prices are far from stratospheric and this is unlikely to cause a market meltdown on its own.
Deutsche Bank’s 2026 global market survey saw “tech bubble risk” towering above all the other potential concerns.
Ironically, that probably means if something does go wrong, the catalyst will come from somewhere else.
Analysts are expecting earnings growth from the S&P 500 index of almost 15% over the calendar year, and if that turns out to be correct (or close to it) we are probably in for another decent year.
NZ dollar will rebound
The NZ dollar is below its long-term average against all the majors, apart from the Japanese yen.
Relative to history, it’s particularly weak against the US dollar and the euro.
That’s been deserved, because we’ve had a deep and long recession while other countries have still been growing.
We’ve also slashed interest rates more than most, making us less attractive to foreign capital.
With our policy settings already at the bottom and cuts to come in places like the US, we should see the interest rate differential narrow.
Add a more upbeat domestic picture to that and we should be back in the 60s against the greenback, and maybe a little stronger against other currencies too.
National will scrape back in, but only just
Financial market predictions are a mug’s game, and you’d need to be even more foolish to make political guesses.
That said, we’ve got to go back 50 years to find the last one-term government, an outcome that would be completely unheard of in the MMP era.
The current National-led coalition is on very shaky ground though, and they might struggle to stay in power if an election was held today.
However, six months is a long time in politics and, if the economy improves as hoped, then National should scrape back in near the end of this year.
I wouldn’t count on it being a strong or conclusive victory though. This election already has the feeling of a close one.
So there you have it, six predictions for the year ahead. Hopefully, a few of them will still look likely by Easter.
Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends you contact an investment adviser.
