The March quarter saw a return to volatility, with rising interest rates and a moderate correction across growth assets. A combination of factors contributed to this shift, including a repricing of software stocks linked to AI, pressure across private equity and credit markets, and escalating geopolitical tensions in the Middle East.

These developments have created a more complex and uncertain environment for investors, with inflation, energy markets and interest rates all moving higher.

Global markets under pressure from energy and geopolitical risks

Tensions in the Middle East have had a significant impact on global energy markets. Restrictions on shipping through the Strait of Hormuz have constrained up to 20% of global oil and gas flows, pushing prices higher and increasing costs across related industries such as fertiliser and plastics.

While markets have remained relatively calm, there is growing concern that prolonged disruption could lead to slower global growth and renewed inflation pressures. Expectations of higher inflation have already driven bond yields higher across developed economies, increasing pressure on central banks.

At this stage, the US Federal Reserve remains in a wait-and-see position. However, expectations for rate cuts have been removed, with markets now anticipating interest rates to remain steady for the remainder of the year.

Australia’s position: exposed to fuel supply and inflation risks

Australia has been particularly exposed to these global developments. With around 90% of fuel imported and limited domestic reserves, the country is vulnerable to supply disruptions and rising energy costs.

While the government has taken steps to ease pressure, including a temporary reduction in fuel excise, fuel prices remain elevated. This comes at a time when inflation was already above target, with both headline and core inflation exceeding the Reserve Bank of Australia’s (RBA) preferred range.

In response, the RBA has already lifted the cash rate to 4.10% following consecutive increases earlier in the year. Markets are currently pricing in further tightening, which is expected to increase borrowing costs and place additional pressure on households and businesses.

Australian share market and sector performance

The Australian share market declined 7.1% in March, finishing the quarter down 1.6%. Performance has been uneven across sectors, with banks and resources continuing to dominate returns while many other sectors lag behind.

Higher interest rates may support bank margins, but slower credit growth is likely to emerge as borrowing becomes more expensive. Meanwhile, the outlook for the resources sector remains relatively positive, supported by elevated commodity prices, provided a global recession is avoided.

Outlook: a more challenging environment ahead

The outlook remains uncertain, largely driven by ongoing disruptions in global energy markets. The longer constraints remain in place through the Strait of Hormuz, the greater the risk to global growth and inflation.

At present, a muddle through scenario of low growth, moderate inflation and elevated interest rates appears most likely. However, risks remain skewed to the downside, particularly if energy supply disruptions persist.

In this environment, a disciplined and long-term investment approach becomes increasingly important. Strategic asset allocation and a focus on quality, value and income are likely to play a more significant role in managing risk and maintaining portfolio stability.

Key risks investors should watch

• Ongoing restrictions to oil and gas flows
• Inflation remaining above target levels
• Further interest rate increases
• Weak returns from AI-driven investment cycles
• Instability in private equity and credit markets
• Broader geopolitical and climate-related disruptions

Speak with an LDB advisor

At LDB, our accountants and advisors, based in Blackburn in Melbourne’s City of Whitehorse, can help you navigate market uncertainty and make informed financial decisions.

Call us on (03) 9875 2900 or get in touch online to discuss your situation. You can also follow LDB on LinkedIn for updates on markets, tax, and financial advice.