The first quarter of 2026 began with considerable promise, only to be derailed by one of the most significant geopolitical events in years.

Through January and February, markets were broadly positive, international and emerging market equities were leading, inflation appeared to be cooling, and investors were increasingly confident that rate cuts were on the horizon. That optimism was abruptly shattered on 28 February, when the United States and Israel launched military strikes on Iran.

The near-complete closure of the Strait of Hormuz that followed sent shockwaves through global markets, reigniting inflation fears, upending rate cut expectations, and triggering a sharp reversal across almost every major asset class in March.

Energy was by far the standout sector, with the MSCI World Energy Index posting a 37.13% gain. This is the largest quarterly rise in energy since Q1 2022. Financials, Consumer Discretionary, and Information Technology all ended the quarter in the red as the March sell-off caused considerable damage.

The Australian market, which has a natural tilt towards energy and resources, offered some insulation from the worst of the global equity declines, though sharp falls in March still weighed heavily on the broader index.

Fixed income provided little shelter during the quarter. Bond yields rose across the market as the oil price spike renewed inflation concerns and effectively ended expectations of further rate cuts in 2026. Credit also came under pressure, with spreads widening across both high yield and investment grade bonds.

Gold experienced an extremely volatile first quarter as the metal initially surpassed $5,000 USD per ounce for the first time in history and continued upwards to reach an all-time high of $5,589.38 USD on 28 January. From here, Gold pulled back sharply to $4,503 USD, resulting in a year-to-date gain of just 5.71%. The pullback was driven largely by rising inflation expectations from the energy shock, which cooled rate cut expectations and raised the opportunity cost of holding gold.

Oil was the unambiguous winner of the quarter, surging nearly 50% in March alone and finishing the quarter up 83.35%. This is a significant move with profound implications for inflation, consumer spending, and the global growth outlook heading into the second quarter.

The S&P 500 returned -4.33% in the first quarter of 2026, snapping a run of impressive gains. The NASDAQ fared worse, declining by 7.11% for the quarter as the technology sector faced a double blow.

Concerns that emerging AI capabilities could disrupt the dominant software-as-a-service business models (SaaS), as well as a broader market sell-off triggered by the outbreak of war in the Middle East both fed into a particularly poor first quarter for this segment of the market.

Contrary to previous years, the mega-cap technology names struggled, with the equal-weighted S&P 500 outperforming the index by nearly 5% and finishing in positive territory, albeit marginally.

Energy was the standout performer, driven by a sharp rise in energy prices that materially improved future profit expectations.

In Australia, the picture was similarly divided. The quarter offered some resilience, supported by the market's natural tilt toward energy and resources, sectors that benefited directly from rising oil prices.

However, the sharp sell-off in March weighed heavily on the broader index, and the re-emergence of inflation concerns raised fresh questions about the RBA's next move, dampening investor sentiment into quarter end. With the outlook for the Australian economy already challenged and evolving at the start of the year, shaped by persistent inflation prints and other domestic headwinds, the conflict in the Middle East has added further pressure.

Emerging markets delivered a mixed result, finishing the quarter broadly flat at -0.17%. The story varied considerably by country: Latin American markets benefited from rising commodity prices, while Asian markets came under pressure given the region's heavy reliance on energy imports flowing through the Strait of Hormuz.

The first quarter of 2026 delivered a volatile and contradictory story for currency markets.

The US dollar began the year on the back foot, extending the weakness we saw in 2025. At the end of last year, we saw concerns over US fiscal policy, fading economic exceptionalism, and narrowing interest rate differentials which all weighed on the sentiment of the US dollar.

That changed sharply from late February, when the outbreak of war in Iran triggered a flight to safety, pushing the US Dollar Index back above 100 as investors sought shelter amid surging oil prices and heightened global uncertainty.

The Australian dollar rallied in February to its strongest level in three years as a result of a hawkish RBA, strong commodity prices, and broad US dollar weakness. The RBA raised its cash rate twice in consecutive meetings in February and March, bringing it to 4.10% as persistent inflation refused to return to target.

However, the outbreak of conflict in the Middle East reversed much of those gains, as investors sought shelter amongst safe haven assets.

Global fixed income markets suffered over the quarter, finishing in negative territory across most major markets.

The quarter began positively with yields drifting lower, inflation appeared to be moderating, and markets were still pricing in a path toward further rate cuts. Similar to other markets, that backdrop shifted abruptly in late February when the outbreak of war in the Middle East sent oil prices surging, reigniting inflation fears and forcing a repricing of rate expectations globally.

In the United States, the Federal Reserve held rates at 3.5–3.75%, balancing still-elevated inflation expectations with emerging signs of labour market cooling. However, the emergence of the conflict in the Middle East effectively ended any prospect of rate cuts any time soon.

The yield on the 10-year US Treasury ended March higher at 4.32%, a sharp move that wiped out the modest gains of January and February and left US bonds in the red for the quarter

In Australia, the story was even more pronounced.

The RBA raised its benchmark rate by 25 basis points to 4.10%, and the yield on the Australian 10-year government bond climbed higher. Investors in Australia are still grappling with persistent inflation, which is now compounded by the energy price shock.

Elsewhere, the picture was broadly similar. European government bond yields rose sharply, while UK gilt yields registered their highest levels since the 2008 financial crisis, rising close to the 5% mark. Credit markets also came under pressure, with spreads widening across both high yield and investment grade bonds.

Fixed income investors are alert to the risk of a stagflation scenario, which is extremely difficult for fixed income fund managers to navigate.

Looking ahead to the remainder of 2026, markets in the near term are likely to be driven by political developments in the Middle East.

If the conflict is resolved over the coming weeks, markets may be able to look through what would likely be a transitory inflation shock. In this scenario, investor focus is likely to return to the more constructive backdrop which was in place prior to the escalation in tensions.

If the conflict is not resolved in the near term, particularly if oil supply continues to be disrupted through the Strait of Hormuz, the outlook becomes materially more challenging. A sustained increase in global oil prices has historically been a very reliable indicator of recession risk. In fact, a sustained rise of 50% or more in oil prices for periods longer than 12 months has preceded nine of the past ten US recessions since World War II.

It is important to note that the United States has significantly increased its domestic oil production over recent years, which means it is less exposed to supply-driven oil shocks than in the past. That said, it remains unlikely that the US would be able to fully insulate itself from the broader repercussions of a global recession should one emerge.

If the conflict is resolved in the short-term, fixed income yields may retreat. Even here, however, there is uncertainty around how much economic damage has already been done, particularly with respect to inflation. A longer-lasting conflict would be more concerning and would likely place upward pressure on yields. Either way, yields have moved higher once again from an already elevated base, which continues to provide attractive income opportunities for investors.

Equity markets have experienced significant dispersion in performance. We continue to believe that the artificial intelligence theme is structural in nature, and short-term market volatility is unlikely to undermine this longer-term opportunity. Prior to the conflict, equity markets appeared to be in a good place with strong earnings, and a resolution would likely support a return to more positive sentiment.

Given this environment, it is difficult to make predictions about how the remainder of the year will unfold across asset classes, as outcomes remain heavily dependent on an inherently unpredictable factor: the trajectory of the Iran conflict.

As highlighted in every update, diversification remains critical. Recent events in the Middle East have reinforced how important diversification is in achieving long-term investment objectives. No one can reliably predict the future, and the past decade has provided ample reminders of this through events such as COVID-19, the Russia–Ukraine war, major policy shifts, and now the Iran conflict.

Maintaining a diversified portfolio that can withstand a range of market conditions not only improves the likelihood of achieving strong long-term outcomes but also helps clients remain invested with confidence regardless of short-term headlines. It is also worth remembering that periods of market weakness often create opportunities for investment managers to acquire high-quality assets at more attractive valuations.

As well as equities and fixed income, it is important to consider the use of alternatives, which can play a valuable role in diversification.

General Advice Warning
This update is issued by Ventura Investment Management Limited (AFSL 253045), which is a related body corporate of Centrepoint Alliance Limited.

The information provided is general advice only and does not take into account your financial circumstances, needs or objectives. Where you are considering the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure Statement for the relevant product before you make any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. It is imperative that you seek advice from a registered professional financial adviser before making any investment decisions.

For more information, refer to the Financial Services Guide (FSG) for Ventura Investment Management Limited (available at https://venturafm.com.au/media/1729/ventura-fsg-update-nov.pdf).

Disclaimer
While Centrepoint Alliance Limited and its related bodies corporate try to ensure that the content of this update is accurate, adequate and complete, it does not represent or warrant its accuracy, adequacy or completeness. Centrepoint Alliance Limited is not responsible for any loss suffered as a result of or in relation of the use of this update. To the extent permitted by law, Centrepoint Alliance Limited excludes any liability, including negligence, for any loss, including indirect or consequential damages arising from or in relation to the use of this update.