March Wrap Up - Reversals and the value of diversification

Investors love certainty. Certainty provides a solid base for sound decision making. Unfortunately, things are anything but certain right now. Tariffs, rapidly changing geopolitics and weak consumer sentiment are making it harder to forecast the pace of company earnings growth and the right level of interest rates. This leads to volatile markets and falling share prices.  As Newton's Law of Gravity might have forecast what went up the most seems to be falling hardest. This has meant a reversal of the 2024 form guide. Investments that did well in 2024 haven't been so lucrative thus far in 2025. The opposite is also true. Last year's laggards are this year's winners. In an uncertain world this demonstrates the importance of having a well-diversified portfolio. Building well diversified portfolios is central to how we manage your money at ASB and has at least cushioned the blow from the tough start to the year.

At the headline level it was a tough quarter for investors.  The S&P 500, a broad measure of US share market performance, ended the March 2025 quarter down 4.3%, its worst performance in three years. The technology company heavy Nasdaq 100 posted its worst quarter in nearly three years, down 8.3%.  Ouch.

But the headlines don't tell the full story. In what was a reversal of form from 2024, shares outside the United States (as measure by MSCI World ex USA index) did materially better outperforming by 10.6% in the quarter, the biggest quarterly outperformance in 23 years.

This theme of reversals of performance from 2024 was echoed across different markets and sectors over the quarter.  

The most dramatic of these was the outperformance of European shares versus the United States. The pan-European Stoxx 600 index, a measure of European share market performance, outpaced the S&P 500 by nearly 17 percent this quarter in US dollar terms, a record outperformance. 

It is amazing how quickly the narrative changes. For years, many had argued that there was little reason to look beyond the US market, where soaring tech giants and relentless economic strength fuelled an era of market dominance. But doubts have grown around the idea of US exceptionalism due to uncertainty from volatile security and tariff policies allied with the Department of Government Efficiency (DOGE) led job cuts. Increased European coordination and a boost to military spending is seen by many as meaning Europe is emerging as a beneficiary of a new world order.

It wasn't just in Europe that we saw a reversal of 2024 form. Ever since the DeepSeek AI announcement in January the damage has been piling up among the stocks that had, until recently, been the market's biggest drivers. Chipmaker Nvidia has had its shares tumble 28% from its January peak. Microsoft, Amazon.com, Alphabet and Meta have all fallen 20% or more from record highs. This is a spectacular fall from grace for the so called “Magnificent 7” stocks which were central to fueling 2024's share returns. 

The other reversal of note has been a material weakening of the US dollar versus its international trading partners. A weakening dollar is another sign of investor concern about the state of the US economy and disquiet about some of the country's policy initiatives.

Source: Weekly market commentary | BlackRock Investment Institute

This quarter is a powerful reminder of the importance of diversification, the idea of not having all your investment eggs in one basket. 

There are a number of important ways we have ensured your portfolios were well diversified that helped protect returns over the quarter.

Gold was the star of the show. Across all core diversified ASB portfolios we had an exposure, albeit modest, to gold, which rose 17.3% for the quarter, significantly outpacing share markets, particularly in the US. This provided an important protection to your investments.

On top of our gold exposure, we had also reallocated a portion of your portfolio's growth assets away from global shares towards shares in more reasonably valued infrastructure companies. While these shares struggled, at least relatively in 2024, they have comfortably outperformed in 2025, again cushioning your portfolio from the tough start to the year.

Within more defensive assets we include an investment in inflation linked bonds, which have outperformed standard government bonds year-to-date, and provide ongoing protection from the risk of sticky inflation as tariffs roll out globally.

Finally, we have remained committed to ensuring you have a well-diversified global share portfolio including companies in Europe, Asia and the Emerging Markets. While this may have cost return in 2024 the value of this well diversified approach has been aptly demonstrated in 2025.