Global financial markets experienced a volatile March quarter, driven primarily by geopolitical developments. Strong performance through January and early February reversed following the late-February escalation of conflict between the US/Israel and Iran.
Overview
This event introduced a sharp increase in uncertainty and was most immediately reflected in energy markets. Oil prices rose significantly as Iranian retaliation disrupted infrastructure and shipping routes in the Gulf region, particularly the Strait of Hormuz, through which a substantial portion of global oil supply flows.
This created short-term inflationary pressure and prompted markets to reassess the outlook for global growth and interest rates. Despite this shock, global equity markets proved relatively resilient. Broad market declines were modest (approximately -3% over the quarter), suggesting investors expect the economic impact of the conflict to be temporary rather than structural.
This view has been partially supported by a ceasefire agreement and relatively limited long-term damage to energy infrastructure. However, uncertainty remains elevated, and any renewed escalation could lead to further market volatility.
Equities
A key theme over the quarter was increased dispersion in equity returns across regions and investment styles. Emerging markets outperformed developed markets, supported by improving capital flows and a softer US dollar backdrop. Global equities outside the US also delivered relatively strong performance, highlighting a rotation away from US market dominance.
At a style level, small-cap and value stocks outperformed, while large-cap growth stocks – particularly those linked to the artificial intelligence theme – underperformed. This reflects a combination of profit-taking, valuation concerns, and a broadening of market leadership after a prolonged period of US mega-cap outperformance.
New Zealand equities lagged global peers, declining over the quarter and delivering relatively modest returns over the past year. This underperformance reflects softer domestic economic conditions and weaker earnings momentum compared to offshore markets.
Fixed Income
Fixed income markets delivered slightly negative returns during the quarter. Rising bond yields, particularly at the longer end of the curve, led to mark-to-market losses as investors repriced expectations for future interest rates in response to inflation risks linked to higher energy prices.
While this has been a short-term headwind, the increase in yields is constructive from a forward-looking perspective. Bond yields are now at multi-decade highs, improving the expected income and return potential of fixed income portfolios. As a result, bonds are increasingly attractive as both a source of income and a diversification tool, although near-term volatility may persist.
Real Assets & Alternatives
Real assets continued to demonstrate resilience in the current environment. Listed infrastructure and property delivered positive returns and outperformed broader equity markets over the quarter. These asset classes tend to benefit from their ability to pass through inflation and generate relatively stable cash flows.
Alternative investments, including insurance-linked securities, gold, and trend-following strategies, also performed well. These assets provided effective diversification benefits and helped offset weakness in traditional fixed income.
Gold & Silver
Precious metals were notable beneficiaries of the geopolitical and macroeconomic backdrop. Gold prices strengthened over the quarter, supported by increased demand for safe-haven assets, ongoing central bank purchases, and concerns around inflation and fiscal sustainability.
Silver also performed strongly, albeit with greater volatility. In addition to its role as a store of value, silver benefits from structural industrial demand, particularly in renewable energy and electronics. This dual demand profile continues to support its long-term outlook.
More broadly, precious metals remain underpinned by several key factors, including elevated geopolitical risk, persistently high global debt levels, and uncertainty around the path of real interest rates. These dynamics reinforce their role as both an inflation hedge and a portfolio diversifier.
Key Takeaways
Overall, the March quarter highlighted the resilience of global markets in the face of geopolitical shocks. While volatility increased, the relatively contained market reaction suggests investors expect the economic impact of recent events to be temporary.
At the same time, underlying market dynamics are shifting. Leadership is broadening beyond US mega-cap growth stocks, bond yields are resetting return expectations in fixed income, and real assets and alternatives are playing an increasingly important role in portfolio construction.
In this environment, maintaining diversification across asset classes, regions, and investment styles remains critical to navigating ongoing uncertainty and capturing opportunities as they arise.
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