Market Insights

The outbreak of conflict between the US-Israel coalition and Iran dominated financial markets in March, driving the S&P/ASX 200 Total Return Index down 7.1% for the month, its worst monthly result since June 2022.The index is down 1.6% for the first quarter of 2026.

Global markets were similarly pressured, with the US S&P 500 declining approximately 5% over the same period.

The consequent disruption to Strait of Hormuz shipping was the primary transmission mechanism, with oil finishing the month above US$100 per barrel, a gain of roughly 50% in March. This energy shock has materially altered the inflation and monetary policy outlook globally.

In Australia, the RBA responded by raising the cash rate by 25 basis points to 4.10% at its March meeting, its second consecutive increase, though the decision was a narrow 5-to-4 vote.

Notably, all board members agreed a further increase was warranted to address domestic inflation pressures, which were present even before the conflict. Several major banks now expect further hikes, with forecasts for the cycle peak ranging from 4.35% to as high as 4.85% if second-round inflation effects persist.

February headline CPI was 3.7%, and is expected to rise further through mid-year as higher energy costs flow through the economy. Q4 GDP growth of 2.6% confirmed the economy entered this period from a position of strength, but higher rates and energy costs are expected to weigh on consumption and dwelling investment going forward.

Energy was by far the best performing sector in the S&P/ASX 200 for March, rising 20.4%.

Higher oil prices also supported the Utilities sector, up 4.9%, given Origin Energy’s large weight and its exposure to oil price-linked LNG production. Defensives held up relatively well, with Insurance (+4%) and Staples (+2%) outperforming.

Less intuitively, Materials was the weakest sector in the month, partly driven by the decline in the gold price which fell almost 12%.

Possible technical factors were at play, with institutional investors potentially liquidating gold positions to meet margin or capital calls from losses in other asset classes. More fundamentally, higher interest rates and a stronger US dollar tend to be headwinds for the gold price. Outside of gold, higher energy costs, particularly in diesel, are a material cost headwind for miners, compounding concerns over a slowing global economy facing higher inflation and interest rates.

Sectors: Technology (-12.5%) and Property (-11.2%) were also material laggards, driven by the outlook for higher interest rates having a greater impact on valuations in both high growth stocks and bond-like stocks. The Size factor was notable: Small Ordinaries (-11%) and Mid Caps (-10%) both underperformed the Large Cap ASX20 index (-6%) by a significant margin, consistent with typical behaviour during market corrections.

Quality and Momentum were the weakest style factors in March, as the market rotated aggressively into low-beta, high-dividend yield names.

Quality returned -10.8% and Momentum -12.4% in the ASX 100. The spread between the best and worst performing sectors, Energy at +20.4% and Technology at -12.5%, was among the widest in recent years, underscoring the value of active stock selection in a market where index returns mask vastly different outcomes beneath the surface.

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