The markets had a short-lived positive start to the year with solid economic fundamentals and easing inflationary pressures. Towards the end of February, the U.S. and Israeli strikes on Iran disrupted the flow of oil and gas through the Strait of Hormuz, creating uncertainty for the global economy and financial markets. The MSCI World Index finished the quarter down -3.2% (local currency) as the markets reacted to the escalation of conflict in the Middle East, higher oil prices, expectations of further rate hikes to contain inflation, and weakness in US software stocks.

Throughout March, investor sentiment swung between hopes for de-escalation and fears of a prolonged conflict. Emerging market equities climbed 2.1%, despite many emerging markets being net energy importers and therefore hit by higher oil prices. The return was positive due to currency movements. Government bonds were volatile during the quarter and experienced a sell-off as higher energy prices fuelled worries overinflation and potential interest rate hikes. Short-dated bonds werehit particularly hard as markets shifted abruptly after many major central banks began unwinding their stance on rate cuts this year.

The Federal Reserve (Fed) kept US interest rates on hold over the quarter at 3.5%-3.75%. The Bloomberg Global Aggregate Index finished the quarter down -0.6%. New Zealand and Australian shares returned -4.5% and -1.6% respectively, with the performance largely driven by the overseas conflicts causing risk aversion amongst investors. The Reserve Bank of New Zealand (RBNZ) held the Official Cash Rate (OCR) at 2.25%, reflecting the need to support the economy against rising inflation. Similar to the global bond market, the Bloomberg NZ Bond Index finished the quarter down -0.5%.

Energy stocks were the standout performers for the quarter, as integrated producers, refiners and energy infrastructure companies all benefited from higher oil prices. Listed infrastructure had a strong quarter, with energy-linked assets, pipelines, and gas utilities outperforming the broader market index, delivering an 8.1% return.