The Month Ahead

March was a challenging month for global financial markets, with geopolitical tensions dominating investor sentiment. The Iran-US-Israel conflict drove bouts of volatility across asset classes as markets attempted to weigh the near term risks around regional stability, global trade and energy supply.

Equity markets were generally weaker, with the largest declines concentrated in Asian markets, where concerns about supply chain disruption and risk aversion weighed heavily. In the US, several major equity indices moved into correction territory, a fall of more than 10% from their highs.

Bond markets, which often benefit during periods of equity market volatility, did not provide their usual ‘safe haven’. Bond prices drifted lower through March, reflecting investor uncertainty and shifting expectations around the global interest rate outlook.

As we move into April, the geopolitical backdrop continues to be the single largest source of uncertainty for markets. The situation in the Middle East remains fluid, and there is still no clear sense of how long tensions will persist or whether the conflict will widen. Developments over recent days have seen the Tehran-backed Houthis in Yemen become more directly involved in the war, alongside a further build-up of US troops in the region.

For investors, the lack of visibility reinforces the need to monitor not only geopolitical developments but also their potential spillover into growth, inflation, and ultimately interest rate expectations. Any meaningful assessment of the economic impact will likely rely on activity and inflation data that reflects conditions in March – the period during which the conflict started and escalated.

Given the current environment, markets are likely to be highly sensitive to indicators of supply chain strain or transport disruptions (including any impact on key shipping routes in the Red Sea area), movements in energy prices and shipping costs, shifts in business and consumer confidence, and any labour market and inflation releases that capture March dynamics.

Until there is clearer direction around progress towards deescalation, uncertainty is likely to remain elevated, and market reactions may continue to be driven more by headlines than fundamentals.

Most major central banks – seven in total – met in March, and despite the large volume of policy communication, there was very little decisive movement. Only the Reserve Bank of Australia opted to raise interest rates, while all others held steady. The overarching theme across the meetings was one of caution and uncertainty, with policymakers emphasising the need for more data before committing to a direction.

This sets up April as a month in which markets will dissect macroeconomic data releases for clues about the future path of interest rates. With central banks wanting to better understand how the latest geopolitical shock interacts with existing inflation trends, incoming data is likely to take on increased importance. Any indication that inflation pressures are rising, or that growth momentum is fading, is likely to influence expectations for rate movement later this year. Already, in some countries, like the UK, the expectations for rate cuts have been replaced by the idea of rate hikes. Conversely, resilience in demand or persistent price pressures may push markets to price in higher for longer policy rates.

New Zealand’s fourth quarter GDP figures, released in March, showed the economy continued to grow, but at a much slower pace, expanding 0.2% quarter on quarter, down sharply from the 0.9% in the prior period and weaker than market expectations. Year on year, GDP grew 1.3%.

Looking ahead, local investors will likely be monitoring the risks associated with potential fuel shortages should geopolitical tensions persist. Any disruption to supply – or sharp, sustained increases in fuel prices – could place upward pressure on transport costs and headline inflation, complicating the Reserve Bank of New Zealand’s task at a time when growth is already under strain.

Key events in April that will help clarify the economic trajectory include, first quarter CPI data, which will indicate whether inflation is continuing to accelerate, business and consumer confidence surveys, which may capture the impact of higher global uncertainty, and trade and shipping data, which could show whether fuel related disruptions are feeding into the broader economy.

Together, these releases will provide important signals on whether New Zealand is beginning to regain momentum, or whether external pressures risk delaying the recovery further.

While the backdrop remains uncertain, we have made some selective adjustments to positioning where we see more attractive opportunities emerging.

In fixed income, we now favour long-dated US government bonds, which offer good value given the risks to economic growth. Recent market moves have pushed yields higher, creating more appealing entry points, particularly as inflation pressures are expected to ease over time, with recent rises in energy prices seen as being more likely to fade than persist.

Within equities, we have moved to an overweight position in US shares and underweight European equities. The US continues to benefit from more resilient economic fundamentals and stronger earnings momentum, while European markets appear more exposed to energy related risks and potential pressure on company profits.

Overall, we remain focused on staying flexible and disciplined, adjusting positioning where risk reward dynamics have become more favourable, while remaining mindful that volatility is likely to persist.