Investment Update

The first quarter of 2026 began on a positive note, with many share markets reaching record highs, extending their positive momentum from 2025. However, markets turned sharply lower in early March after the US‑Israel strikes on Iran drove oil prices above US$100 a barrel. Against this backdrop, the MSCI All Country World Index fell 2.9% over the quarter (in local currency terms).

Bond markets also came under pressure amid concerns about a reacceleration in inflation, a view shared by many central banks that met during the period.

Key themes over the quarter included:

The Middle East conflict was the dominant driver during the quarter, with the major economic fallout being the effective closing of the Strait of Hormuz, which accounts for about 20% of global oil flow. The closure of the Strait – and the bombing of key infrastructure assets across the region – saw the price of energy-related commodities surge.

The equity market sell-off saw many US share markets enter correction territory (a 10% drop from its recent peak), and they ended the quarter in negative territory, following a run of three back-to-back positive quarterly outcomes.

Several central banks met following the early‑March onset of war, with most signalling heightened concern about the inflationary impact of higher oil prices. The US Federal Reserve (the Fed) left interest rates unchanged, highlighting the difficult trade‑off between a slowing labour market, which would normally argue for rate cuts, and persistent inflation pressures, which justify tighter policy.

The Reserve Bank of Australia (RBA) raised its policy rate by 25 basis points to 4.10%, citing a “material risk” that inflation could remain above target for longer, partly reflecting rising fuel costs.

In Europe, both the Bank of England (BoE) and the European Central Bank (ECB) kept interest rates on hold. The ECB lifted its short‑term inflation expectations, while the BoE warned that an inflation shock could push inflation to 3.5%.

Meanwhile, the Bank of Japan (BoJ) left policy settings unchanged but retained a bias toward higher interest rates, cautioning that rising oil prices could exacerbate inflation pressures.

At a sector level, software stocks underperformed during the quarter amid concerns that advances in AI could automate key functions and weigh on future revenue growth – this notion was exacerbated following the release of Anthropic’s Claude Cowork platform. The sell-off resulted in the Software & Services Index declining by more than 20% over the quarter.

In New Zealand, sentiment largely followed overseas developments in the Middle East.

As widely expected, the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 2.25%. However, the Committee struck a somewhat dovish tone, saying “if the economy evolves as expected, monetary policy is likely to remain accommodative for some time”.

In the central bank’s Monetary Policy Statement (MPS), it said it doesn’t expect to raise interest rates until late-2026 or early-2027, while it sees inflation at 2.3% and the unemployment rate at 5% by the end of the year.

Inflation concerns were also front and centre. In a speech to business leaders, RBNZ Governor Anna Breman said New Zealand is likely to see higher short-term inflation but warned pre-emptive policy tightening could hinder the economic recovery. “Tightening monetary policy in response to a short-lived disruption would only dampen growth without materially improving near-term inflation outcomes”, she said.

Earlier in the quarter, economic data showed that annual inflation had risen to 3.1%, above the central bank’s target range, and the highest level since October 2024.

On a quarterly basis, prices rose 0.6%, with airfares, petrol and telco services the main contributors, while these were partially offset by cheaper food prices.

Consumer and business confidence took a hit during the quarter as higher oil prices and broad geopolitical tensions dampened sentiment. The ANZ Business Outlook Survey saw headline confidence drop 26 points. Past activity fell from 23% to 18%, with retail and construction experiencing the biggest declines. Inflation indicators also rose, with the average amount firms expect to raise their prices by rising from 2% to 2.4%.

Meanwhile the ANZ-Roy Morgan Consumer Confidence dropped from 100.1 to 91.3, which also highlighted concerns around geopolitical unrest and the inflation outlook. In addition, the share of households saying now is a good time to purchase a major household item (a key gauge of retail spending) dropped by 10 points to -14, matching its October level.

The first quarter proved volatile for international equity markets. Initially, many reached, or came close to, all‑time record highs, supported by strong momentum and improving investor confidence. However, those gains were largely unwound by quarter end as Middle East tensions escalated and investor risk appetite faded.

US equities declined over the quarter as concerns deepened around elevated valuations, particularly within AI‑related stocks, and as trade uncertainty remained unresolved. These pressures were later compounded by rising global risk aversion, leading to a pullback across all the major US indices. By the end of the quarter, the S&P 500 Index was down 4.3%, while the Nasdaq 100 Index finished 7.0% lower.

European and UK equities also finished mostly lower, despite their markets initially being supported by easing inflationary pressures. Momentum stalled with the US-Israel-Iran conflict weighing on sentiment, especially given that the region is more exposed to energy-related risks.

Asian markets followed a similar pattern with many share markets giving up early-quarter gains in March. However, their strong start meant several markets ended the quarter in positive territory, including the Nikkei 225 Index and South Korea’s KOSPI Index.

Central banks remained an important influence throughout the period. While policy rates were unchanged, increased uncertainty around growth, inflation, and geopolitics led investors to reassess the prospect of rate cuts, contributing to the increased volatility across equity markets.

New Zealand equities were also up and down, with gains earlier in the period offset by weaker market conditions in March, which ultimately saw the NZX 50 Index close the quarter down 4.7%.

The quarter was shaped by the domestic reporting season, mixed economic data, and shifting expectations around monetary policy. While some earnings results offered reassurance around the near‑term outlook, broader sentiment was tempered by a soft growth environment and persistent inflation pressures. Market confidence also later fluctuated in response to global developments.

The strongest performing company over the quarter was a2 Milk (+8.6%), after it delivered a strong half‑year result and upgraded guidance, while Serko (-45.5%) and Vista Group (-35.0%) underperformed amid global weakness in the software sector.

Across the Tasman, Australian equities also experienced volatility. Early gains were supported by resilient economic conditions, but sentiment weakened as inflation data surprised on the upside and the Reserve Bank of Australia (RBA) raised interest rates in response. Towards the end of the quarter, escalating global geopolitical tensions weighed on investor confidence and contributed to a more cautious market backdrop. Despite touching a record high, the ASX 200 Index ended the quarter down 1.6%.

International bond markets were volatile, with yields moving within a broad range before rising more noticeably towards the end of the period. When bond yields rise, their prices fall.

Early on, markets reacted to mixed inflation and economic data, with firmer inflation readings lifting yields at times, while softer growth indicators provided intermittent support.

Interest rates were largely left unchanged over the quarter, but guidance continued to stress the need for greater confidence that inflation was sustainably easing. This cautious stance limited bond market gains and kept investors highly responsive to incoming data.

Bond markets weakened more decisively later in the period following the escalation of geopolitical conflict. While geopolitical uncertainty would typically support bonds, a sharp rise in oil prices renewed inflation concerns and reduced the usual flight‑to‑quality appeal. In fact, several markets moved from pricing in the likelihood of interest rate cuts, to expecting rate hikes.

The yield on the US government 10-year bond rose 15 basis points over the quarter, to 4.32%, with European and UK bond yields trending in the same direction. Japanese government bonds were also notably weak, reflecting expectations of further normalisation in domestic monetary policy.

New Zealand bond markets broadly took their lead from offshore markets. While yields moved lower early on, this trend reversed later in the period as overseas yields rose and inflation concerns re‑emerged. The yield on the New Zealand 10‑year government bond finished the quarter 32 basis points higher, at 4.72%.

Domestic economic data played a role in shifting market expectations. Inflation remained stubborn, while GDP data highlighted a fragile growth environment. Concerns that inflation pressures may prove more persistent prompted investors to reassess the outlook for monetary policy, particularly as global energy prices rose sharply in March.

The RBNZ left the OCR unchanged at its meetings, but its guidance gradually shifted. More recent commentary from the Bank’s Governor signalled increased discomfort with the inflation outlook, but noted that its rate-setting Committee would likely look through short-term spikes in inflation.

Australian bonds were also weaker, with inflation concerns pushing the 10-year government bond to its highest level since 2011, finishing the quarter up 23 basis points, to 4.97%.

The New Zealand listed property sector underperformed the broader share market over the quarter, falling 9.2%, driven in part by rising bond yields, which typically weigh on this interest-rate-sensitive sector. All 10 of the companies in the index ended the quarter lower, with Stride Property Group the biggest underperformer, ending down more than 20%.

Across the Tasman, the Australian listed property index also struggled, ending the quarter down 16.6%. Rising interest rates were the main headwind after the RBA lifted interest rates twice, by 25 basis points each time, amid inflation concerns.

Meanwhile, international listed infrastructure ended the quarter in positive territory, though its gains were trimmed late in the period amid geopolitical unrest. Over the quarter, the FTSE Global Infrastructure (100% NZD Hedge) rose 8.1%.