Quarterly Market Comment

As an active fund manager, Octagon Asset Management prioritises high-quality research as an input to decision making. It draws on research from a range of sources, local and global. This includes research provided by Forsyth Barr. Below is its most recent Quarterly Market Comment.

For the quarter ended 31 May 2026

• Investment markets were mixed over the quarter. Global share markets led the way, bouncing after the pullback seen in March. The MSCI World Index fell sharply early in the quarter as conflict involving the US, Israel, and Iran disrupted energy markets and unsettled investors, but recovered over April and May to finish the quarter up 7.3%.
• The US market recovery has been supported by resilient corporate earnings, ongoing enthusiasm around artificial intelligence, and easing fears that the March energy shock would become a sustained global growth scare.
• Australian and New Zealand shares have been weaker. The New Zealand market recovered modestly in May but was down -3.5% over the quarter. Australian equities have also lagged the global rally, with higher domestic interest rates and persistent inflation concerns weighing on sentiment, driving the S&P/ASX 200 Index down -4.0%.
• Fixed income returns were impacted by growing inflation concerns, pressuring yields higher and bond prices lower over most of the quarter. NZ investment-grade corporate bonds returned -0.1% for the quarter.

Global markets recover from March Middle East shock

March was dominated by escalating conflict in the Middle East and a sharp rise in energy prices. The closure of the Strait of Hormuz, a key route for global oil and commodity shipments, pushed prices higher and raised concerns about inflation and slower global growth.

Equity markets sold off and bond yields rose as investors questioned whether central banks would need to keep interest rates higher for longer. Higher energy prices matter because they lift transport and business costs, which can eventually flow through to household bills and consumer prices.

By April and May, conditions had improved. A ceasefire agreement helped oil prices ease, allowing markets to refocus on company fundamentals. Solid global first quarter earnings and ongoing enthusiasm around artificial intelligence also supported the rebound. It was a useful reminder that markets can react sharply to fast-moving news, but also recover when the worst-feared outcomes do not eventuate.

Major equity market indices returns (indexed to 100 on 1 Jan 2026)

Source: Refinitiv, Forsyth Barr analysis

Enthusiasm for artificial intelligence has been a key driver for markets

Artificial intelligence remains a key long-term theme for global equities. Today’s equity index benchmarks are heavily concentrated in a small number of large technology companies, many of which have significant exposure to AI. At the end of May, the biggest names in the MSCI World Index included NVIDIA, Apple, Microsoft, Amazon, Alphabet, Broadcom, Taiwan Semiconductor, and Meta—all businesses with significant exposure to the AI theme. This is an important reminder that a broad ‘passive’ index fund may not be as diversified as it appears. The S&P 500, for example, has around half of its value weighted towards technology-related companies.

While AI is set to be a transformational step-change for the global economy, it also carries real risks. The pace of change is fast, competition is intensifying, and the cost of building AI infrastructure remains high. Not every company will succeed, and as AI becomes more accessible, new competitors can emerge quickly—putting pressure on today’s market leaders.

History shows that major technological shifts bring both significant opportunities and real challenges, and AI is no different. The key takeaway is that having some exposure to this theme makes sense, but balance matters. Diversification remains one of the most reliable tools investors have—and in a fast-moving environment like this, it’s as important as ever.

Interest rates moving higher

Interest rate expectations have shifted materially over the period. At the start of the year, markets expected rates to remain relatively low through 2026. More recently, however, higher energy prices and firmer inflation have led investors to expect interest rates to rise in several major economies.

We have already seen this play out across the Tasman. The Reserve Bank of Australia raised the cash rate by +25bp to 4.35% at its May meeting—the third rate hike this year—citing the need to bring inflation down. This has weighed on parts of the Australian share market, particularly interest-rate sensitive sectors such as property and consumer-related companies.

In New Zealand, the Reserve Bank kept the Official Cash Rate at 2.25% at its May decision. The decision was finely balanced, with the Monetary Policy Committee split 3–3 and RBNZ Governor Breman casting the deciding vote to keep rates on hold. The RBNZ indicated that interest rates are likely to move higher in coming months, with markets and economists expecting a +25bp rate hike at its next meeting in July. The pace and size of any rate hikes over the year ahead will depend on how quickly higher energy prices feed through to core consumer prices, and how persistent those price increases prove to be.

Central bank policy interest rates and market pricing (%)

Source: Bloomberg, ANZ, Forsyth Barr analysis 

A steady approach through uncertain times 

The past three months have given investors plenty to digest: geopolitical conflict, higher energy prices, shifting central bank expectations, and volatile equity markets. Global equities recovered well after the March sell-off, but returns were not evenly shared. New Zealand shares have faced a slower domestic recovery and a more cautious earnings backdrop, while Australian equities are coming under pressure from higher interest rates and a re-rating of banking stocks. 

That does not mean the broader outlook has deteriorated. Global corporate earnings have generally been solid, some of the worst fears around energy disruption have eased, and higher bond yields are now offering better income opportunities than were available for much of the past decade. Property and infrastructure continue to offer attractive opportunities and diversification. Market recoveries are rarely uniform. Different regions, sectors, and asset classes move at different times, which is why diversification matters.

Matt Henry
Head of Wealth Management Research

Zoe Wallis
Investment Strategist 

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