New Zealand’s sovereign wealth fund is signalling that the extraordinary gains in global equities may be difficult to sustain, despite itself delivering a 14.2% return over the year to June. The New Zealand Superannuation Fund grew to NZ$94.4bn, even while remaining underweight in US equities as the S&P 500 gained more than 20% amid enthusiasm for artificial intelligence in the year to the end of June 2026. Its performance nevertheless illustrates the potential cost of avoiding concentrated exposure to the technology stocks driving global markets.

The fund’s strategy reflects a deliberate preference for diversification over short-term market momentum. Around half of its portfolio is invested in equities, with the remainder spread across assets including timber, property and private investments, while its passive reference benchmark holds 80% in global equities. Although this positioning meant the fund slightly underperformed its benchmark over the year, it has generated NZ$22bn more than that benchmark over the past two decades.

The fund now expects its long-term annual return to fall to 7.2%, down from 7.8% earlier this year, as it anticipates equity returns will eventually moderate. Its chief executive argued that US equity returns over recent years have been unusually strong compared with their 20-year average, increasing the possibility of a mean reversion towards more long-term returns.

The fund’s approach highlights a broader challenge for institutional investors: capturing the upside of concentrated technology rallies without allowing short-term performance to dictate long-term portfolio construction. As AI enthusiasm continues to support equity valuations, New Zealand’s strategy suggests that the opportunity cost of diversification may be rising today, but the cost of excessive concentration could become more significant if markets eventually revert towards historical returns.

- Muthu Ramanathan

UK employment fell by 26,000 in August, while wage growth slowed to its weakest pace in almost six years, highlighting the continued cooling of the labour market. Average earnings including bonuses rose 3.9% year-on-year in the three months to July, down from 4.2% previously, while private-sector regular pay growth fell to 2.9%. At the same time, vacancies declined by 8,000 to 702,000, suggesting employers are becoming increasingly cautious about expanding their workforces.

The weakness is particularly significant because the Bank of England has been watching wage growth closely as it assesses inflationary pressure. KPMG chief economist Yael Selfin said the data would strengthen the position of the MPC’s more dovish members, arguing that weak worker bargaining power and subdued wage growth should continue to provide “disinflationary pressure”. However, public-sector pay growth remained much stronger at 6.3%, partly reflecting NHS pay awards, creating a notable divide between public and private-sector workers.

The wider picture is therefore one of a “low hire, low fire” labour market, as described by ICAEW chief economist Suren Thiru. Payrolls have fallen by 39,000 over the past three months, while unemployment remains at 4.9%, suggesting businesses are reducing recruitment rather than rapidly cutting existing staff. Berenberg’s Andrew Wishart argued that the combination of weaker employment and relatively strong economic growth could indicate improving productivity, although Thiru warned that falling vacancies signal weakening demand for labour.

For the Bank, this creates a difficult trade-off. August inflation has risen to 3.1% (with annual core CPI being 2.6%), but weakening employment and slowing private-sector wages reduce the risk of persistent domestic inflation. With the Bank Rate already at 3.75%, the latest figures suggest that policymakers can afford to focus on whether inflation becomes embedded in wages rather than responding aggressively to the current energy-driven price pressures.

- Neev Dave

UK inflation accelerated to 3.1% in August from 2.9% in July, intensifying pressure on the Bank of England as the Monetary Policy Committee considers its next interest-rate decision. The increase, driven primarily by rising petrol prices and higher household energy bills, leaves inflation well above the Bank’s 2% target, although economists expect the Bank Rate to remain at 3.75% this week. With CPI inflation forecast to reach or exceed 4% by early next year, the latest figures have revived expectations that borrowing costs could rise later this year as the energy shock continues to feed through the economy.

The key question for policymakers is whether rising energy prices remain an external shock or begin generating broader domestic inflation. Services inflation, closely watched by the MPC, remained at 3.4% in August, while core inflation held at 2.6%, suggesting that price pressures have so far remained relatively contained beyond energy. Francesco Pesole, strategist at ING, said there was “still no evidence that inflationary pressures are spreading beyond energy”, while Yael Selfin, chief economist at KPMG, warned that prolonged above-target inflation could eventually influence wage negotiations and business pricing. Markets subsequently reduced the probability of a rate rise at this week’s meeting from 35% to 15%, while two-year gilt yields fell 14 basis points to 4.76%.

The challenge is therefore becoming one of timing rather than direction. Andrew Goodwin, UK economist at Oxford Economics, said the latest figures showed “no evidence that second-round effects are emerging”, but argued that the scale of external price pressures could increasingly “force the MPC’s hand”. If energy prices remain elevated, the Bank may face pressure to tighten policy to prevent inflation expectations and wage demands from becoming entrenched, yet higher rates would also weigh on an economy already showing weakness in employment and wages. The August data therefore leaves the MPC balancing the risk of doing too much in response to a temporary energy shock against doing too little and allowing it to become a persistent inflation problem.

- Muthu Ramanathan

Until next time,

The Long and Short

Markets, Made Sense