Iran and oil remain front-and-centre

Investment and commodity markets spent March being whipsawed by daily developments in the Iran war, while also reacting to President Trump’s ongoing commentary. While there have been occasional signs of progress in negotiations between the United States and Iran, the Strait of Hormuz remains largely closed. Workarounds, such as Saudi Arabia’s East–West pipeline, provide only limited relief. A further chokepoint could emerge if the Yemen-based Houthis attempt to blockade access to the Red Sea, which is a crucial route for Europe-bound oil products.

There are still many ways this war could play out. Diplomatic negotiations could lead to an end to the war, or at least a ceasefire. Alternatively, the United States could decide to step back and leave other countries to deal with the ongoing blockade of the Strait of Hormuz. Another possibility is that the US escalates its involvement, including deploying troops on the ground, which would increase the risk of energy, electricity and steel infrastructure being targeted. In a more severe scenario, civilian infrastructure such as water desalination plants and bridges could also be affected. In short, the outlook remains highly uncertain.

Despite the uncertainty, it is worth noting that for the United States in particular, the current supply shock is smaller and more narrowly focused than the oil shocks of the nineteen seventies that contributed to significant inflation. At that time, the global economy was far more dependent on oil. The way higher energy costs feed through to the economy has also changed. Today it is not only about crude oil. It is a broader story involving refined fuels and petrochemical products as well.

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Developed market equities – select opportunities

Global equities sold off by around 6% in March - although much less so for unhedged equities in AUD terms, given the drop in the A$ over the month offset some of the offshore equity weakness. Oil prices - along with petrochemical derivatives like diesel, jet fuel and urea, and certain industrial commodities like aluminium - continuing to rise over the month. This led the market to reassess the trajectory for inflation and central bank decision functions, and to consider the potential risk of falling into a stagflationary environment (i.e. soft growth with elevated unemployment levels, along with high inflation).

Growth data from the major developed economies continues to point toward low but positive growth, consistent with a soft-landing narrative rather than recession risk. While we are currently ‘cloaked in the fog of war’, we believe that US EPS growth will remain reasonably strong and has the potential to continue to exceed consensus estimates. Nonetheless, a severely prolonged disruption to energy supplies would weigh heavily on earnings growth.

There was further share price weakness in the global technology sector, particularly in software and Software as a Service (SaaS) names - a decline fuelled by intensifying concerns that rapid advances in AI may disrupt or even displace traditional subscription-based business models. It is interesting to note that prior tech weakness was centred around whether AI-related companies would recoup sufficient revenues to justify the high levels of capital expenditure, yet the current weakness is fuelled by certain AI companies being too successful and displacing existing business models. The reality is nuanced - those with deeply embedded enterprise platforms, especially those providing mission-critical systems of record, regulatory workflows, risk management or compliance infrastructure, will continue to have a strong business proposition.

Our base case is that parts of this sell-off will reverse as fundamentals reassert themselves, and as investors differentiate between true displacement risk and speculative fear. AI-related investment growth remains strong, while enterprise AI adoption remains steady, with ~20% of US firms using AI in their regular business functions. We continue to expect large impacts on labour productivity in the areas where generative AI has been deployed.

Within our developed market equity allocations we have been biased toward holding a higher currency-hedged component. Relative interest rate differentials favour the AUD and the RBA direction of travel is for higher rates. We expect a greater consistency of returns by maintaining a reasonable level of currency-hedged exposures over the medium to longer term, though in the short term with risks around Iran remaining, unhedged exposure may become increasingly important for portfolios to manage volatility.

Australian shares – sound fundamentals and resource-heavy sector exposure

Australian share market returns in March were weaker than global peers, despite a commodities-heavy sector bias amongst listed companies. The RBA hiked interest rates - the second time this year - as the inflation outlook turned more challenging. Consumer sentiment continued to soften, with elevated fuel prices and rising mortgage rates dampening demand.

Concerns around diesel fuel availability - vital for manufacturing, transportation and farming activities - remain elevated in Australia. While Australian fuel inventories are low compared to global peers, levels are no lower than they were pre-war. The Federal government announced the inception of a new Fuel Supply Taskforce and cut the fuel excise in hopes of bridging the gap – and putting a floor under weak consumer sentiment - until a more reliable supply chain is reestablished.

Fuel price jump: Australia saw the biggest increase across developed countries

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Source: Haver Analytics, Goldman Sachs

Following the volatility we’ve witnessed in commodity prices, the outlook for the earnings profile of Australia’s materials sector has improved, and the sector stands out for its relative resilience in a more volatile macro environment. Recent strengthening demand for metals and industrial inputs - copper, precious metals and energy-linked commodities have all moved higher in response to geopolitical tensions - along with improving forward-looking indicators are feeding into improved margins for resource-exposed companies. As a result, we have moved to slightly overweight on Australian equities, tilted toward the materials sector.

Fed Funds rate outlook – bias has shifted

The US economy’s starting point makes large spillovers to broader inflation unlikely. The US labour market is softening, wage growth is already below the pace that would be consistent with 2% inflation, and inflation expectations are well anchored.

Since the start of the Iran war, market pricing for the US Fed funds rate has swung sharply, with markets now pricing in little chance that the FOMC will adjust rates in 2026. This is in sharp contrast to prior to the war, when two rate cuts were priced in. Unsurprisingly given the Iran-war inspired volatility, there was a period in late March when the market flirted with the possibility that we would get a US rate hike this year.

US Fed funds rate: Market expectations swing from expecting two+ cuts in 2026, to none

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Source: Bloomberg

The Fed typically does not tighten in response to oil shocks alone. However, the bar for easing now remains high given the energy‑driven inflation impulse; we believe that the centre of gravity at the Fed will remain hawkish until price pressures are contained.

Emerging Markets – impacts of oil price rise are distinct by region and country

The geopolitical events and resultant impact on petrochemical derivatives affect emerging market (EM) regions and individual economies to varying degrees. For investors, this reinforces the need to increasingly treat the allocation to EM equities as a collection of distinct opportunities rather than a single aggregated exposure.

One key distinction is whether a country is a net energy importer (eg India) or exporter (eg Brazil). Also, each country has devised their own remedy to the current situation; for example, in Indonesia and Malaysia petrol prices have been subsidised, while some countries have mandated government workers to WFH to conserve energy. So, the macro and earnings outlook for emerging markets in this environment needs to be assessed at the country level, rather than at a sector-wide level.

One bright spot recently – and further highlighting the benefits from prudent diversification as well as the need to take a deeper country-by-country assessment when investing in EMs at present – has been the China equity market. While not immune to what is occurring in the Middle East, China is relatively better positioned to weather an extended impasse. This has supported the Chinese stock market, which strongly outperformed the global equity index over the past month.

China stock market: Relative outperformance in March

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Source: Bloomberg. CSI 300 is the broad Chinese share index

Portfolio construction considerations during times of stress

The first line of defence in geopolitical shocks is prudent diversification. However, as we have seen, during sharp energy shocks the opportunity set for diversification is constrained, as both shares and bonds tend to suffer in this scenario. Some traditional safe-haven assets have treaded water or sold off since the start of the Iran war – but we have begun to see some assets stabilise. It is also prudent to ensure multi-asset portfolios mitigate lingering stagflationary risks via allocations to real assets such as US TIPS and infrastructure shares.

The recent softening in the gold price reflects profit-taking following a sustained upward movement as shifting expectations for US interest rates and USD strength triggered a correction. While we remain alert to the near-term headwinds for precious metals emanating from the abovementioned factors (rates and USD), we continue to hold an overweight position for structural reasons.

We believe that US long-duration instruments and quality assets still provide stability when shocks occur. But in addition, thinking around diversification needs to evolve. Traditional regional splits may be less informative than exposures by currency, political bloc, and dependency on contested flows - whether energy, technology, or data.

The global growth backdrop - while uneven - remains resilient, with clear signs that earnings breadth is improving. While we remain comfortable taking opportunities to slowly increase overall portfolio risk, for now we remain cautious and look to add dry powder, prioritising liquidity and duration.

We expect to continue shifting portfolios as necessary throughout the months ahead, with a preference for tilting the portfolio towards global secular trends and seeking to use cyclical pullbacks as points of entry for consolidating longer-term positions.