March was all about the conflict in the Middle East. Israel and the US launched a military strike against Iran, targeting Iranian leaders. Iran effectively shut down the Strait of Hormuz, a crucial shipping route for oil and gas exports from the Middle East. Oil prices shot through the roof (a barrel of Brent crude oil over $100), which saw commodities perform well. However, almost everything else was negative. Government bonds globally experienced a sell-off as those higher commodity prices fuelled worries over inflation and potential interest rate rises. Equity markets globally fell by around 6% collectively but several countries were down over 10% for March.

Energy stocks were the only standout performing sector (particularly in the UK), with integrated producers, refiners and energy infrastructure all benefiting from higher oil prices. US Technology stocks suffered more than other sectors, which was a little surprising, considering many IT companies reported solid revenue growth. The software sector was particularly hard hit. In Europe the economically sensitive consumer discretionary sector was the hardest hit. Unlike in the US, European semiconductors and IT hardware fared better, with positive returns after some well-received corporate earnings. Japan, Asia Pacific and Emerging Markets all suffered from the conflicts in the Middle East, triggering a risk-off sentiment toward energy-importing countries.

New Zealand equities also struggled over the month, with the larger stocks doing slightly better than the smaller cap stocks. The Australian large caps held up much better, although this was centred on a few of the top 20 ranked companies.

The US Federal Reserve kept policy unchanged, and tempered market expectations for imminent rate cuts. The ECB also left is policy rates unchanged, signalling no immediate urgency to alter borrowing costs. The BoE and BoJ also kept policy unchanged, citing tension in the Middle East and uncertainty over oil prices introduced additional risks.

The Iran conflict drove the NZD lower against the USD during the month, falling from 0.60 to around 0.57 (-4.2%). The NZD also continued to fall versus the AUD, now down to 0.83.

All the portfolio series risk profiles were negative for March, on the back of negative returns from equities, globally and domestically, developed and emerging, and fixed interest globally and domestically. This has also led to negative returns for the quarter, the first for several quarters. Looking forward, we believe fixed interest overshot so offers value going forward. Similarly, if we can see an end or truce to the conflict in the Middle East, then we should see equity markets return to reflect their true valuations.