Macroeconomic Regime Shift & The Geopolitical Shock. The macroeconomic landscape experienced a violent regime shift over the first quarter of 2026. While the year began with a fundamentally driven broadening out of the equity rally, the sudden escalation of the Middle East conflict and the subsequent transit constraints on the Strait of Hormuz plunged global markets into an acute geopolitical shock by late March. Prior to this escalation, the narrative was dominated by a healthy "rotation trade," as capital actively rotated out of crowded, high-multiple technology names and into the "real economy." Concurrently, central bank divergence became a persistent theme. While the US Federal Reserve maintained a cautious holding pattern, the Reserve Bank of Australia (RBA) delivered two second consecutive 0.25% rate hikes in February and March, bringing the cash rate to4.10% in response to tight domestic capacity, a highly resilient labour market, and sticky supply-side inflation.

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From a valuation and earnings perspective, underlying corporate fundamentals remain heavily bifurcated. The recent earnings cycle highlighted an ongoing divergence between the mega-cap hyper scalers—who continue to execute on massive Agentic AI infrastructure build-outs—and the broader enterprise software sector, which faces severe multiple compression due to AI disruption risks. However, the market's pivot toward cyclical value has been validated by robust cash flow generation across US Industrials, Financials, Small Caps and Commodities. Valuations in these "real economy" sectors remain far less demanding, providing a necessary anchor as geopolitical uncertainty forces a repricing of risk premiums across broader global equity indices. More broadly earnings revisions have continued to strengthen (outside of software), across most sectors. Analysts are yet to start pricing in the inflationary impacts of the Iran War and is something that will be closely watched in earnings results commentary from management teams over the next two months.

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Commodity Markets: Pre and Post-War Dynamics. The structural commodity trade has also radically bifurcated in the wake of the March supply shock. Pre-war, the commodities complex was characterized by a structural bid in copper, precious and other heavy materials, driven almost entirely by the physical bottlenecks of the global AI data center build-out and secular electrification trends. Post-war, the narrative was violently hijacked by the energy complex. The transit disruptions through the Strait of Hormuz have forced a massive rerating in Brent crude, fundamentally altering the short-term macroeconomic risk profile. Simultaneously, safe-haven dynamics have ebbed back and forth for the central-bank-driven bid in gold. More energy dependent regions have sold gold to support their currency as the safe haven bid for  the USD has played a part in impacting those currencies.

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Inflation Risks & Monetary Policy Divergence. The energy shock introduces a severe right-tail risk to global inflation trajectories, particularly if the Hormuz blockade becomes elongated. While global central banks were previously preparing to navigate the delayed onset of tariff-induced inflation and stronger PMIs. A sustained oil price spike threatens to heavily compress corporate margins, squeeze domestic consumption, and embed persistency in headline inflation. For both the RBA and the Fed, this complicates the monetary policy reaction function, raising the risk of a “stagflationary” environment where central banks are forced to maintain a hawkish bias despite a potentially slowing growth profile. However, the Fed has remained relatively well balanced, seemingly more prepared to remain on pause as opposed to a hike as their next move.

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Portfolio Positioning & Strategic Outlook. Looking forward, our portfolio positioning reflects a neutral growth stance where we recognise the various scenarios at play during the War. On one hand the US could be pulled into an elongated battle where the Strait remains closed and stagflation risks increase materially medium term. However, the situation could just as easily get resolved relatively quickly given President Trump’s ability to achieve deals in his perceived favour one way or another. We maintain core structural exposure to the physical layer of the AI capex cycle—specifically through a balanced technology exposure leaning towards semiconductor supply chains and domestic resources. Other themes that we are still constructive on (subject to the ongoing stagflation risk not becoming more pronounced) are Small Caps, Large Cap Financials and European defence equities. In defensive assets Floating rate IG credit plays a useful role in insulating portfolios from the rates volatility. We are also starting to see value in Australian fixed rate duration given the additional two plus hikes priced into the curve. Private debt remains an area under pressure and warrants a highly selective approach.

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Overall, the March macroeconomic environment requires a measured, tactical approach as opposed to an all-out risk off one. While the underlying secular tailwinds of AI productivity and industrial activity remain intact, the immediate horizon is clouded by the unpredictable duration of the Middle East conflict and its corresponding potential for an energy led stagflationary environment.

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