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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Market Insights

Australian equity markets began 2026 with continued divergence beneath the surface. The S&P/ASX 200 rose +1.78% in January, supported primarily by a powerful rally in Materials, while growth-oriented sectors and the Quality factor remained under pressure.

The defining feature of the month was commodity strength. Gold rose approximately +13% in USD terms, extending what has now been one of the strongest multi-year advances in decades. Central bank gold purchases, which according to the World Gold Council reached record levels in 2024 and remained elevated through 2025, continue to provide structural support. Copper also firmed, metallurgical coal rallied, uranium strengthened, and spodumene prices surged sharply.

In contrast, Technology stocks declined heavily as global markets grappled with the accelerating pace of AI development. Several new large language model releases in December and January heightened concerns about disruption risk for incumbent software businesses. The result was a rapid compression in valuation multiples globally, particularly across high-duration growth equities.

We highlight caution when assessing any new technology investment given the current pace of distribution and supersession.

From a macro perspective, Australian inflation data for the December quarter surprised modestly to the upside, with headline CPI at 3.8% year-on-year and trimmed mean inflation remaining, in our opinion, sticky. Producer price inflation also remained firm. As a result, expectations for the RBA cash rate target have been repriced materially, and the RBA subsequently raised the cash rate by 25bps in early February to 3.85%.

The divergence between Australia and the United States remains noteworthy. While the Federal Reserve is broadly expected to continue its easing cycle, Australia’s policy stance is more neutral to mildly restrictive. This interest rate differential, combined with strong commodity prices, saw the Australian dollar rally approximately +4.4% in January to around US$0.70.

Globally, equity markets were constructive. Emerging markets outperformed (+8.8%), Japan remained firm, and the S&P 500 advanced modestly. However, beneath headline returns, sector rotation has intensified. The dispersion between winners and losers, both across sectors and within them, continues to widen.

In our view, this environment reinforces the importance of disciplined active management. Markets are increasingly differentiating between balance sheet strength and leverage, genuine cash-flow durability and narrative growth, structural advantage and commoditised exposure.

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Market Insights

Australian equity markets finished the year on a stronger note, with the traditional “Santa rally” delivering a +1.3% gain for the S&P/ASX 200 in December, taking full-year returns to approximately +10%. While headline performance was constructive, market dynamics beneath the surface remained fragmented, continuing the theme rotations that characterised much of 2025.

Macroeconomic data releases were lighter through the month, but commentary from the RBA reinforced a more cautious policy stance. The Bank left the cash rate unchanged at 3.60%, citing a still-tight labour market and stronger-than-expected business investment. Importantly, the RBA pushed back against expectations of near-term rate cuts, leaving investors with a more asymmetric outlook in which policy easing appears distant, and the risk of higher-for-longer settings remains possible.

Sector performance told a clear story. Materials was the standout in December and for the year as a whole, benefiting from tailwinds across commodities. Gold prices surged above US$4,300/oz, copper rose sharply, and lithium prices continued their recovery from mid-year lows. These moves drove strong relative performance across gold producers, base metals, and select bulk commodity exposures.

In contrast, Technology and Healthcare were among the weakest sectors, reflecting a continued de-rating of higher-multiple growth stocks amid a less supportive interest-rate backdrop and a stronger Australian dollar. The Quality factor, which dominated returns in earlier phases of the cycle, remained under pressure as momentum and value continued to lead.

Encouragingly, small and mid-cap equities showed greater resilience, supported by, in our opinion, more attractive starting valuations, stock-specific catalysts, and ongoing corporate activity. The dispersion between winners and losers remained wide, reinforcing the importance of active management and bottom-up research.

Moving to global markets, December was more balanced. U.S. equity markets advanced modestly, supported by cooling inflation data and expectations for further Federal Reserve rate cuts following the December easing. In contrast to Australia, the U.S. policy trajectory appears more clearly biased toward gradual easing, which has supported equity multiples and earnings sentiment.

Europe remained steady but subdued, while Japan continued to stand out as a relative outperformer, driven by earnings momentum and ongoing governance reform. China’s market was mixed, with targeted stimulus measures providing some support, but property-sector weakness continuing to weigh on confidence.

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