Quarterly economic update: January - March 2026
A Volatile Start to 2026
The first quarter of 2026 delivered a sharp reminder that markets rarely move in a straight line. After a strong start to the year—driven by optimism around artificial intelligence and easing global interest rate expectations—markets were rattled by a significant geopolitical escalation in the Middle East.
The conflict involving the United States, Israel and Iran triggered a surge in energy prices and reignited concerns around inflation, global growth, and central bank policy. As a result, investor sentiment deteriorated rapidly through March, leading to widespread market declines.
Key Market Drivers
Geopolitical Risk Takes Centre Stage
The most significant development this quarter was the escalation of conflict in the Middle East, particularly disruptions to energy supply routes through the Strait of Hormuz. This led to sharp increases in oil, natural gas, and fertiliser prices; renewed fears of prolonged global inflation; and increased volatility across equity and bond markets.
While there were tentative signs of de-escalation toward the end of March, uncertainty remains elevated.
Inflation Pressures Re-Emerge
Rising energy costs have added to existing inflationary pressures globally. This presents a difficult balancing act for central banks:
Raise interest rates to control inflation
Or ease policy to support slowing economic growth
This “stagflation” risk—where inflation remains high while growth slows—has drawn comparisons to the economic environment of the 1970s.
Investment Market Performance
Global equities delivered negative returns for the quarter: Unhedged global shares fell -5.8% and hedged global shares declined -2.7%. Markets initially reached record highs in January before reversing sharply following geopolitical developments in late February. However regional performance varied, with strong gains in parts of Asia (notably Korea and Taiwan), weakness in China due to energy dependency concerns, and US markets declined amid inflation and geopolitical risks.
Australian equities also struggled, returning -2.0% for the quarter, with performance across sectors was highly uneven. Top performers were Energy (+36.1%) and Utilities and Consumer Staples, while Information Technology (-27.2%), Health Care (-16.8%) and Real Estate and Consumer Discretionary (rate-sensitive sectors) underperformed. Rising interest rates and global uncertainty were key drivers of this divergence.
Bond markets also faced pressure, with rising inflation expectations pushed bond yields higher, resulting in capital losses for investors.
Australian Economic Update
Australia entered 2026 with some positive momentum, with solid employment growth and early signs of improved consumer spending. However, conditions deteriorated as the quarter progressed -inflation rose to 3.7% (year to February), the Reserve Bank of Australia lifted the cash rate to 4.1% following consecutive rate hikes, and rising petrol prices further strained household budgets. The cost of living challenge remains a key headwind for consumers and economic growth.
Outlook: Navigating Uncertainty
Looking ahead, several key risks are likely to shape market performance. Geopolitical developments will remain front of mind, with any resolution or further escalation of the Middle East conflict expected to have a significant impact on energy prices, inflation trajectories, and overall market sentiment.
At the same time, central banks face a difficult balancing act. Persistent inflation may require further interest rate increases, while signs of slowing economic growth could justify a more supportive policy approach. This tension creates ongoing uncertainty for both markets and policymakers.
Consumer resilience will also be a critical factor, particularly in Australia. Household spending is likely to remain under pressure given elevated interest rates and ongoing cost of living challenges, which could weigh on economic growth in the months ahead.
Key Takeaways for Investors
Periods like this can feel uncomfortable, but they are not unusual in long-term investing. The current environment reinforces the importance of diversification, as different asset classes and sectors tend to respond differently to economic shocks. It also highlights how difficult it is to time markets, with sharp downturns often followed by equally swift recoveries. Above all, it underscores the value of maintaining a long-term perspective, recognising that short-term volatility is a normal part of the investment journey.
If you’d like to discuss how current market conditions may impact your portfolio or financial plan, our team at AGS Financial Group is here to help.
| Asset Class Summary – 31 March 2026 | 1 Year % including dividends | 3 year % pa including dividends |
|---|---|---|
| Australian Shares | 11.6 | 9.4 |
| Global Shares (hedged) | 19.0 | 16.1 |
| Global Shares (unhedged) | 9.2 | 15.7 |
| Australian Property Securities | -1.9 | 7.9 |
| Australian Bonds | 1.5 | 2.1 |
| Global Bonds (hedged) | 3.0 | 3.1 |
| Cash | 3.8 | 4.1 |
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