KEY POINTS
- Share markets shifted lower in response to military action in the Middle East and associated oil supply disruption.
- Software stocks sold down due to concerns over the impact of Artificial Intelligence.
- Bond yields moved higher due to expected inflationary impact of higher energy prices.
- The RBA lifted the cash rate twice, which provided support for the $A.
OIL CRISIS TRIGGERS A “MEASURED” SHARE MARKET DECLINE
After edging higher over January and February, share markets declined in March upon the commencement of air strikes against Iran by the U.S. and Israel, which then led to retaliatory action by Iran. This saw the Strait of Hormuz closed, directly impacting the transportation of around 20% of the globe’s oil supply. Crude oil prices escalated 76.6% over the 3-month period.
Global equities averaged a return of negative 3.3% for the quarter, with the U.S. underperforming this average by 1.0%. Much of the U.S. underperformance can be attributed to the technology sector, where concerns over the impact of Artificial Intelligence on software businesses was a dominant theme. The “Magnificent 7” top technology stocks all recorded drawdowns, with Microsoft experiencing the largest decline of 23.3%. Losses in the technology sector were partially offset by gains in the more defensively positioned sectors, such as consumer staples, where prices rose by an average of 9.7%.
In contrast, the United Kingdom market performed well, supported by its sizeable energy sector, contributing to a 4.1% gain. Also posting a positive result was the Japanese market, where the Nikkei 225 Index rose 2.0% for quarter, despite falling 12.8% in the month of March. The landslide victory of Prime Minister Sanae Takaichi’s government in early February was viewed positively by share markets, with a belief that the result will support increased fiscal spending and a pro economic growth agenda. A weaker Japanese Yen also contributed to strength in export orientated Japanese companies over the quarter.
With a strong reliance on oil imported from the Middle East, China’s share market was sold down heavily over the quarter, declining by 8.5%. Other emerging markets also declined in March due to high oil dependency. However, the continuation of very strong support for chip and semi-conductor manufacturing companies in Taiwan and South Korea earlier in the quarter, meant that the decline in the MSCI Emerging Market Index was limited to 2.8%.
Consistent with the strong support for more defensively positioned sectors over the quarter was a sharp increase in global listed infrastructure stocks, which posted a gain of 8.4%. There was also solid support for global listed property, which rose 1.0% over the quarter, despite weakening in March. However, the increase in Australian cash interest rates saw a large reduction in the local listed property sector, which fell 16.4% over the quarter.
RESOURCES & ENERGY RALLY SEE AUSTRALIAN SHARES OUTPERFORM
The Australian share market outperformed the global average over the March quarter, with the decline in the S&P ASX 200 Index restricted to just 1.6%. In response to the jump in oil and gas prices, energy (up 37.7%) was the strongest performer. Resource stocks were also well supported, despite flat iron ore prices. Gold mining stocks were included in this resource rally early in the quarter; however, the gold price declined sharply following the commencement of hostilities in the Middle East – but still finished 4.1% higher for the quarter. Outside of the resources and energy sectors, it was also a relatively strong quarter for defensive sectors, with utilities, consumer staples and financial stocks all finishing in positive territory.
Results from the profit reporting season for the period ending December were generally better than expected, with stock price reactions to both earnings beats and misses being particularly large. The healthcare sector had a poor profit reporting season, with CSL (down 17.4%) once again disappointing the market with its results. Further weakness was experienced in the technology sector (down 28.0%), which reflected the broader global concerns for software businesses.
INTEREST RATES MOVE HIGHER ON INFLATION CONCERNS
The RBA lifted cash rates here by 0.25% in both February and March, to bring the cash interest rate to 4.1%. This tightening in policy was in response to recent higher inflation readings. The combination of the policy tightening, and the inflationary concerns arising from the spike in oil prices, pushed longer term bond yields higher as well. The Australian 10-year Government bond yield lifted from 4.74% to 4.90%. Inflationary fears also triggered an increase in global yields, with the U.S. 10-year Treasury Bond yield rising from 4.18% to 4.30%. The Australian currency was well supported over the March quarter, with the higher interest rates available here contributing to a jump in the $A from US 66.9 cents to US 68.5 cents. The $A was also stronger relative to the Euro (up 4.6%) and the Japanese Yen (up 4.2%). The appreciation in the $A acted to reduce the value of overseas investments held on an unhedged currency basis, thereby magnifying the negative global equity returns recorded over the quarter.
CONSIDERATIONS FOR INVESTORS
It is not possible to forecast with any conviction exactly how current geopolitical tensions and energy market disruptions will evolve. However one possible scenario is that oil supply will be disrupted for an extended period of time and that the United States will withdraw from direct military action in the Middle East relatively soon. This scenario would likely have different implications for the United States economy when compared with regions that have far higher dependency on Middle Eastern sourced oil and related commodities.
A sharp and positive bounce in U.S. equities in early April was justified on the news that the U.S. was planning an imminent withdrawal from military activities in the Middle East, irrespective of whether the Strait of Hormuz was safe for travel. With the US being a net energy exporter, and being close to self-sufficiency in petroleum products, the U.S. economy is better positioned than most to deal with elevated oil prices and disrupted supply. Whether non-U.S. equity markets should have also bounced on this news to the extent they did is less clear.
Adding to the attraction of the U.S. share market is the dominance of the technology sector. Similar to the pattern that prevailed during the COVID-19 crisis period, companies in the technology sector that don’t rely on the physical movement of goods or people may be better placed in this oil crisis. Further, the somewhat indiscriminate drawdown in share prices of the technology sector, and software businesses in particular, may present selective opportunities for active managers focused on longer-term growth prospects.
More cyclical industrial companies may find an extended period of oil supply disruption far more challenging – particularly those operating in economies with a heavy dependence on imported energy. These businesses will need to deal with the dual issues of higher input costs and more constrained growth in demand. Smaller companies may be more vulnerable than larger companies, which has already been reflected, at least to some extent, in relative share price movements over recent weeks. This more challenging economic environment may also have negative implications for credit markets and financial stocks, with the risk of higher credit defaults arguably not reflected in current credit market pricing.
The economic environment may become even more challenging if central banks follow the Reserve Bank of Australia’s lead and push interest rates higher. Recent movements in bond yields indicate money markets are anticipating a tightening of monetary policy. The recency of central bank responses to the inflation outbreak post COVID may be influencing this consensus view. However, the post COVID inflation episode was characterised by an unprecedented globally synchronised release of pent-up demand. In contrast, the oil crisis period inflation will be supply induced with demand actually constrained by the reduction in disposable income caused by the higher oil price impost. Given that the aim of higher interest rates is to subdue demand, it less clear that a tighter monetary policy is the appropriate response to the oil crisis. As such, central banks may ultimately decide to limit further rate increases on the basis that the supply induced inflation is temporary, and economies are highly vulnerable to any further demand destruction.
For investors, the current uncertainty and elevated risks impacting markets from a number of sources can be unsettling. However, history suggests that maintaining long term strategic exposures through periods of crisis has been a reliable approach. The chart below shows the long history of Australian share market growth, despite the myriad of unexpected events and crises. Notwithstanding this historical evidence, sustaining commitment to long term strategies at the height of a crisis may be the most challenging aspect of investing.
Source: AMP. Oliver’s Insights, 23/03/2026.
Important Information
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR, MSCI World ex Australia NR Hdg AUD, FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged), MSCI China (Composite) in CN, Deutsche Borse DAX 30 Performance TR in EU. Hang Seng TR in HKD, MSCI United Kingdom TR in GBP, Nikkei 225 in JPY, S&P 500 TR in USD
This Market Update contains information that is general in nature. It does not constitute financial or investment advice. Any information, material or commentary is intended to provide general information only and does not take into account personal circumstances. Zone Financial Pty Ltd makes no representation as to the accuracy or completeness of the information. Before acting on any information contained in this document, each person should consider its appropriateness having regard to their own or their clients’ individual objectives, financial situation and needs. You should obtain independent taxation, financial and legal advice relating to this information and consider it carefully before making any decision or recommendation.
