March 26 Quarterly Review

“The stock market is a device for transferring money from the impatient to the patient.” 

Warren Buffett

Of course, on the day I wanted to release my March 26 Quarterly, a ceasefire is announced in Iran and markets go back to FOMO mode. At any rate, all is instructive.

The first quarter of 2026 has been challenging for investors. In March, the ASX saw its largest drop since 2022, down 8% for the month, and ending the quarter in negative territory. The behemoth US equity market was down even further, almost 5% for the quarter, with the tech heavy NASDAQ down almost 6%.

The price of oil spiked following US/Israeli attacks on Iran and the effective closure of the Straight of Hormuz, which facilitates around 20% of global oil trade, among other important commodities (fertiliser, LNG, industrial chemicals).

These tensions add to expectations that inflation will see a meaningful uptick, interest rates will have to rise, and overall conditions will remain difficult until these supply constraints can be resolved.

The ‘Mad King’

Donald Trump fired off an expletive laden tweet on Easter Sunday, threatening to obliterate Iranian power plants and bridges and “send them to Hell” if they didn’t “open the F***ing Straight”. He also signed off the tweet with, “Praise be to Allah”, in a clearly inflammatory sledge. What a nice Easter message.

The relatively mild response from markets so far suggests that major investors continue to trust in Trump’s self-interest, that his rhetoric is part of his negotiating tactics, and that eventually Trump will back down.  

But more seriously, the disconnect between official language, action, and reality, increases the risks of unintended consequences and makes it harder for individual investors to make rational decisions.

Portfolio implications

1.      Long-term impact of AI still being masticated:

Markets were halfway through digesting the long-term implications of AI when the Iran war kicked off. A violent rotation from high growth stocks, into more stable names with links to real assets was well underway, and the oil price shock further hurt valuations. The market darlings of yesteryear have been decidedly turfed out. In Australia, tech stocks like WiseTech (WTC) and Xero (XRO), previously traded at multiples over 100x earnings. Now, with the uncertainty introduced by AI, their long-term value is being questioned, and are trading at much more modest multiples of earnings. Markets are in ‘prove it’ mode, pouring cold water on the optimism of years past, and testing shareholders, whether true believers or fair-weather friends.

For stocks hurt by this existential moment, the key question comes down to business fundamentals (as always). Will AI reasonably disrupt their business models and impact long-term cashflows? The proof will be in the pudding, but the market has been in ‘shoot first, ask questions later’ mode up to now, and many babies have been thrown out with the bathwater.  

2.      Inflation is back, baby

We had a brief reprieve from the spectre of inflation after Covid stimulus. Trump put an end to that when he started bombing Iran. Now, with supply chains in disarray, markets are getting flashbacks to the 1970s Oil Crisis, caused by eerily similar conditions and the Iranian Revolution. What then led to double-digit inflation prints, and the infamous 18% interest rates in the early 80s, is now expected to feed through into prices today.

In Australia, the 10-yr Government Bond has been sitting at 5% for a while now, on the high end for developed economies. If this creeps up, it will lead to a gradual tightening of economic conditions that will weigh on growth assets like house prices and shares.

There is no easy way through periods of high inflation. Real assets – property, infrastructure, and gold – have historically done well, as have businesses that are able to pass on price increases. The real psychological challenge is to let go of the security of holding on to cash in periods of high inflation and market volatility. The guaranteed worst performer over periods of inflation is a dollar under the bed.

3.      Panic merchants live in tents, not palaces

There’s nothing like petrol prices going up to foment panic on Main St. The current Iran conflict has unleashed a cavalcade of panic merchants and doomsday prophets, armed by the MSM while the missiles are flying, who are proclaiming the end of civilisation.

Of course, petrol prices go up, farmers can’t drive their tractors anymore, no more food, and we’ll all die. It’s so obvious!

Well, maybe, but probably not. The panic merchants usually sound smart, get clicks, point at problems and make seemingly obvious links. But the complexity of reality is easily overlooked in periods of heightened emotion. Stepping back from the emotional edge is important for investors armed with an investment strategy grounded in experience, diversified appropriately, and long-term in nature.

Conclusion

We’ve been tested this quarter, with a burst of negative sentiment and panic. While there are real challenges for markets to consider – war, de-globalisation, AI, inflation – there are also reasonably sound financial conditions underlying.

Assuming de-escalation of the Iran conflict, the re-opening of the Straight of Hormuz, and the gradual normalisation of fuel prices, markets will expect a path higher for the year. Markets seem to be holding onto this base case scenario, and the recent market falls have been mild relative to news headlines.

Tail risks abound, as ever, and we may see an unexpected escalation that forces markets to reprice significantly. I expect we would see significantly greater volatility in this case, particularly in the event of a ground war in the Middle East.

Whatever eventuates, our investment strategy cannot be updated on the fly based on crises and macroeconomic forecasts. The foundations of a robust investment strategy should be put in place long before they are tested.

In most cases, sensible diversification of quality assets, bucketed in growth/defensive segments depending on timeframe, provides a strong foundation. Assuming we have sufficient time or defensive reserves to get through a crisis (historically, 3-4yrs worth of defensive reserves for retirement portfolios), we have the ability to hold our growth assets through periods of hardship and pessimism, without having to sell them at discounted prices.

As always, if you want to arrange some time to discuss your portfolio or planning needs, please get in touch.

This information has been prepared without taking into account your objectives, financial situation or needs. It is general advice only and should not be considered personal financial advice.

Before acting on this information, you should consider whether it is appropriate for you having regard to your objectives, financial situation and needs. Where appropriate, you should seek professional advice and read the relevant Product Disclosure Statement (PDS) or other disclosure documents before making any financial decision.

Past performance is not a reliable indicator of future performance. Any projections, forecasts or opinions expressed are subject to change without notice.