Quarterly Market Comment

For the quarter ended 31 March 2026

• The past three months have seen the MSCI World Index fall -3.6% in US dollar terms, in large part driven by a tough month in March following the escalating military conflict in the Middle East. Returns in New Zealand dollars were slightly better, but still -3.2%.
• Market performance across regions over the quarter was broadly negative to relatively flat. The US S&P 500 index fell -4.3% in local terms, while UK and Japanese markets eked out small gains. NZ equities declined -4.7%; Australian equities were -1.6% lower over the quarter.
• Fixed income returns were impacted by growing inflation concerns, pressuring yields higher and bond prices lower over the quarter. NZ investment-grade corporate bonds fell -0.5% for the quarter.

Middle East conflict delivers a tough March

Geopolitical tensions were the main driver of markets in March, with conflict between the US, Israel, and Iran increasing uncertainty and weighing on market sentiment. While the focus here is on financial impacts, it is important to acknowledge the human cost of any military action. At the time of writing, a tentative ceasefire has been agreed, offering some hope for de-escalation.

Even before the conflict broke out in March, markets were facing a more challenging backdrop. Concerns had been building around elevated valuations in parts of the technology sector, alongside a more cautious reassessment of how quickly artificial intelligence (AI) would translate into tangible results, softening equity returns in some parts of the market.

The conflict in Iran quickly translated into tangible economic consequences—most notably through disruptions to global energy supply. The closure of the Strait of Hormuz, a critical artery for global trade, has been central to market concerns. The Strait facilitates roughly 20% of global oil shipments, alongside a meaningful share of natural gas and other key commodities. As a result, oil prices rose sharply—from around US$70 per barrel to trading as high as around US$120—with gas prices also increasing materially.

These higher energy costs are now flowing through to the broader economy. Fuel and transport costs have risen, and many goods and services are becoming more expensive. Airlines have increased ticket prices, shipping costs have climbed, and businesses are starting to pass on higher input costs to customers. Disruptions have also affected related industries such as chemicals and fertilisers, adding to overall inflation pressures.

Equity markets have responded negatively, reflecting concerns that prolonged disruption could keep energy prices elevated. This raises the risk of both higher inflation and slower global growth.

Encouragingly, there have been early signs that an end to the fighting may be approaching, although uncertainty remains around what operations through the Strait will look like even if/when some form of de-escalation occurs.

MSCI world index and geopolitical events

Source: Refinitiv, Forsyth Barr analysis

Volatility and the role of sentiment

Recent market movements have been driven largely by fast-changing news, highlighting how quickly sentiment can move markets in the short term. Daily updates—ranging from military developments to progress in negotiations—have led to increased volatility.

If disruptions to key global trade routes persist, the impact on inflation and economic growth could be more lasting. However, history shows that markets and businesses often adapt more quickly than expected. Supply chains adjust, companies respond, and over time, underlying economic fundamentals tend to reassert themselves.

Artificial intelligence: a rapidly evolving landscape

While global events have been driving markets in the short term, artificial intelligence (AI) remains an important longer-term trend.

AI is advancing quickly. The technology is improving, becoming cheaper, and being used more widely across different industries. This is creating opportunities for businesses to work more efficiently, reduce costs, and develop new sources of revenue.

Markets are now moving into a more selective phase. Earlier excitement is giving way to a greater focus on companies that can actually turn AI into real profits—those with strong competitive positions and clear ways to make money from the technology.

At the same time, the risks are becoming clearer. The pace of change is fast, competition is increasing, and the level of investment required is high. Not all companies will benefit, and some may come under pressure as it becomes easier for new competitors to enter the market.

Periods of major technological change have historically brought both disruption and opportunity. While outcomes will differ across companies, the overall opportunity is growing.

Interest rates moving higher with bond yields improving

Recent global tensions have pushed energy prices higher, which is lifting the cost of living. These increases are starting to flow through to other areas, including transport, food, and everyday goods.

This has made things more complicated for central banks. While interest rates were previously expected to remain relatively steady before moving gradually higher, there is a growing sense that interest rates may rise quicker than previously thought, especially if cost pressures don’t ease.

As a result, bond yields have risen since the start of the year, offering improved income. At the same time, bonds continue to provide some protection during more acute periods of market fluctuations.

NZ corporate bond index (yield-to-maturity) and RBNZ official cash rate

Source: Bloomberg, ANZ, Forsyth Barr analysis

A steady approach through uncertain times

The past quarter has been a reminder that ups and downs are a normal part of investing. Global events, rising costs, and changing expectations can all create periods of uncertainty.

In times like this, markets can react quickly to new information and sometimes move more than they should in the short term. Over time, however, what really matters are the basics—how companies earn money, grow, and generate cash. Markets tend to settle and reflect these fundamentals in the long run.

Responding to short-term market moves is often counterproductive. A well diversified portfolio, combined with a disciplined long-term approach, remains the most effective way to navigate these environments.

Matt Henry
Head of Wealth Management Research

Zoe Wallis
Investment Strategist 

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