Australian shares fell 7.2% in March, bringing 12-month returns to 11.7%. Rising domestic inflation and the RBA’s second rate hike of the cycle weighed heavily on sentiment. Materials declined sharply following a strong start to the year, while IT and REITs were impacted by rising real bond yields and AI-related disruption concerns.

 

Emerging market equities fell 9.5% in AUD terms in March, bringing 12-month returns to 17.9%. The sell-off was driven by reduced expectations of global rate cuts, a strengthening USD and the sharp rise in oil prices, which disproportionately affect major EM oil importers.

 

Hedged global listed property fell 8.3% in March, bringing 12-month returns to 7.8%. Hedged global listed infrastructure fell 3.1%, bringing 12-month returns to 16.0%. Australian listed property fell 11.2%, bringing 12-month returns to -2.3%. Gains made earlier in the year unwound rapidly as rising oil prices pushed bond yields higher and markets reassessed the global cash rate outlook.

 

In terms of the middle east there remains a wide gap between both parties on the 10 or 15 points for any extended deal. Several of the Iranian conditions appear fundamentally incompatible with US and Israeli redlines. The US clearly wants an off-ramp, but the Strait of Hormuz needs to be re-opened at a minimum, which has become a key point of leverage for Iran. Data continues to suggest oil exports from virtually every major Middle Eastern producer ex-Iran have collapsed to near zero since the conflict began, with Asia being the primary buyer. This likely means prices of refined products will remain elevated for some time.

 

The emerging energy crisis brings risk of increased inflation and reduced growth, as reflected in cash rate expectations.

 

The shift in the short end of the curve has been significant. Rate cut expectations have moderated by around 25 basis points (bps) in the US and Europe, and by approximately 50bps in the United Kingdom, though the implied path remains materially higher than it was before the conflict.

 

In Australia the market revised its cash rate expectations from 4.25% to 4.75%, the 10-year yield rose significantly during March, reaching 5.15%.

 

The AUD fell from above US$0.71 to below US$0.69 by month end, despite rising interest rate differentials earlier in March. The USD appreciated around 2.0%, supported by safe-haven demand and a shift in expectations towards tighter Fed policy.

 

The risks are of further falls in equity markets taking us to a 15% top to bottom correction are high given uncertainty around the ceasefire and flow of ships through the Strait along with still stretched valuations, political uncertainty associated with Trump & the midterm elections and increasing worries about private credit and the impact of AI. However, returns should still be positive for the year thanks to Fed rate cuts likely later in the year, Trump still likely to pivot to consumer-friendly policies ahead of the midterms and solid profit growth.

 

Bonds are likely to provide returns around running yield.

 

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.