Insights

Global markets experienced a volatile and ultimately weaker March quarter in 2026, as the outbreak of war in Iran in late February triggered a sharp repricing across energy markets, inflation expectations, and risk assets. While markets entered the year on relatively stable footing, the surge in oil and gas prices and the associated tightening in financial conditions led to a pronounced sell-off through March, leaving many equity markets negative for the quarter.

Rather than delivering consistent gains, the period was defined by two distinct phases: a relatively contained and range-bound environment through January and early February, followed by a geopolitically driven drawdown as energy markets spiked and stagflation concerns intensified.

Quarter defined by shock, not continuity. The defining feature of the March quarter was the rapid escalation of the Iran conflict and its transmission through global energy markets. Disruptions, both realised and anticipated, to supply chains and shipping routes through the Strait of Hormuz introduced a material shock to oil and gas markets.

Oil prices surged sharply through March, rising by more than 50% at peak levels during the period. This represented a significant terms-of-trade shock for energy-importing economies and a rapid tightening in global financial conditions.

Markets quickly shifted away from a “gradual disinflation and easing” narrative toward one increasingly focused on inflation persistence, delayed rate cuts, and downside risks to growth. The speed and scale of this repricing were key drivers of cross-asset volatility.

Equities: March drawdown dominates outcomes. Global equities finished the quarter under pressure, with March losses overwhelming earlier stability. Major indices declined meaningfully from February highs, as higher energy prices, rising bond yields, and increased uncertainty drove a broad-based risk-off move.

The sell-off reflected a combination of sharply rising input costs (particularly energy), upward pressure on inflation expectations and bond yields, and a widening of equity risk premiums amid geopolitical uncertainty.

Sector performance diverged significantly. Energy stocks were clear outperformers, benefiting directly from higher commodity prices. In contrast, consumer discretionary, transport, and other energy-sensitive sectors lagged, reflecting margin pressure and demand concerns.

Growth and technology sectors experienced increased volatility, particularly where valuations remained elevated and sensitive to changes in discount-rates. While structural themes such as A.I. remained intact, near-term performance became more uneven.

Regionally, energy-importing economies, particularly in Europe and parts of Asia, underperformed. Commodity-exporting markets, including Australia, proved more resilient on a relative basis, though not immune to the broader risk-off environment.

Australian equities reflected a similar pattern: strength in resources partially offset weakness elsewhere, but overall market returns were constrained by global sentiment and domestic growth concerns.

Fixed income, credit, and real assets. Fixed income markets were heavily influenced by the inflationary implications of the energy shock. Longer-dated bond yields rose through March as markets repriced inflation expectations and pushed back the timing of policy easing. This dynamic reduced the effectiveness of bonds as a hedge during the equity sell-off, particularly in the early phase of the shock.

Credit markets were comparatively resilient but weakened at the margin. Spreads widened modestly, particularly in more cyclical segments, as investors reassessed growth risks and demanded higher compensation for uncertainty.

Real assets were the primary beneficiaries of the environment, particularly infrastructure. Energy markets were the central transmission channel, with oil and gas prices rising sharply due to supply disruptions and logistical constraints. Broader commodities were also supported, while gold benefited from safe-haven demand.

Macro: from disinflation to stagflation risk. The macro narrative shifted materially over the course of the quarter. The energy shock interrupted what had been a gradual disinflation trend, reintroducing upside risks to headline inflation and creating uncertainty around the policy outlook.

Higher fuel and energy costs fed through to increased production and transportation costs, weaker real household incomes, and softer consumer sentiment.

In the US, growth remained resilient in early-quarter data but showed signs of pressure as financial conditions tightened. The Federal Reserve adopted a more cautious stance, signalling that further easing would depend on inflation developments rather than follow a pre-set path. In Europe, already-subdued growth conditions were further challenged by higher energy costs, reinforcing downside risks to activity. China’s recovery remained uneven, with policy support offsetting but falling short of fully overcoming structural headwinds.

In Australia, the policy backdrop tightened further during the quarter. The Reserve Bank of Australia raised the cash rate, responding to still-elevated services inflation and sticky domestic price pressures despite weak per-capita growth. This tightening occurred against an already subdued economic backdrop marked by soft household consumption, easing labour-market momentum, and pressure on real incomes. The subsequent surge in global energy prices added a further layer of complexity, introducing upside risks to headline inflation at a time when the central bank was already concerned about inflation persistence.

Politics, policy, and energy security. Geopolitical developments became the central driver of markets during the March quarter. The conflict involving Iran highlighted the fragility of global energy systems and the critical role of key transit routes such as the Strait of Hormuz.

Even partial disruptions were sufficient to trigger outsized moves in energy markets, underscoring the sensitivity to short-term supply and the market’s sensitivity to geopolitical risk.

The episode reinforced several structural themes including the growing importance of energy security as a key policy priority, increased volatility in commodity markets, and greater linkage between geopolitical events and macro-outcomes. While markets showed some tentative signs of stabilisation toward the end of the quarter, uncertainty around the duration and escalation of the conflict remained elevated.

Summary & Outlook. The March quarter of 2026 marked a clear departure from the conditions that characterised much of 2025. Rather than a continuation of the risk rally, the period demonstrated how quickly markets can reprice in response to external shocks, particularly those affecting energy and inflation.

For investors, several key lessons stand out. Supply-side shocks remain a critical risk in the current environment; Inflation is not yet fully anchored and can re-accelerate through commodity channels; and Diversification across real assets and commodities remains valuable to portfolio resilience.

Looking ahead, the trajectory of the Iran conflict and its impact on energy markets will be central to the outlook. A stabilisation in oil and gas prices would allow the disinflation narrative to reassert itself, while a prolonged disruption would sustain stagflation pressures and keep volatility elevated.

In this environment, maintaining diversification, prioritising quality and resilience, and avoiding excessive exposure to rate-sensitive assets or sectors and companies with narrow margins remains critical as the cycle continues to evolve.

The Investment & Research team at PSK are always monitoring market conditions and data points to ensure portfolios align with our overall long-term objectives. If you’d like to discuss any of the points raised, please contact your Adviser or call us on (02) 8365 8300.