Looking back at March: Iran reshapes the outlook, but fundamentals still anchor the view

Introduction

March was dominated by the US–Israel strikes on Iran on 28 February and the escalation that followed. Energy prices surged, supply chains came under renewed pressure, and markets rapidly reassessed inflation, growth and policy paths. Beneath that headline, the data told a more nuanced story – US inflation continued to moderate, China’s trade and activity data surprised sharply to the upside, and business sentiment in Japan, the UK and Europe improved meaningfully. The RBA’s unexpected rate hike added a domestic wrinkle. Our base case remains constructive, but the conflict introduces a wider distribution of outcomes than at any point in the past year.

What moved the dial

Supportive signals

• US inflation continued to cool: the Consumer Price Index fell to 2.4% annually in January – the lowest since May 2025 – while the jobs market remained stable with unemployment holding at 4.3%.
• US Federal Reserve held rates steady: the Fed held its rate at 3.50–3.75%, signalling it would only cut further if economic data supported it. Minutes showed officials divided, with some preferring to pause given inflation still near 3%.
• China exports surged: exports rose 21.8% year-on-year in January–February, well above the 7.1% forecast, as the trade surplus hit a record high – a sign of strong global demand despite ongoing US–China trade tensions.
• China activity beat forecasts: factory output rose 6.3% and retail sales grew 2.8% in January–February, both ahead of expectations, supported by strong Lunar New Year holiday spending.
• Broad-based improvement in developed markets: Japan’s PMI hit a 33-month high, UK business activity reached a 22-month high, and the Eurozone outlook brightened with improving confidence driven by Germany’s spending push.

Watch-outs

• Iran conflict escalated sharply: US–Israel strikes on Iran on 28 February triggered retaliatory attacks, the death of Supreme Leader Khamenei, regional airspace shutdowns, and serious threats to the Strait of Hormuz – a key shipping lane carrying around 20% of the world’s oil.
• RBA surprised with a rate hike: the Reserve Bank raised the cash rate by 0.25% to 4.1%, bucking the global easing trend. The RBA cited strong consumer spending and a tight jobs market as risks of a wage–price spiral. Also, inflationary pressures building in the second half of 2025 were cited due to greater capacity pressures, a labour market tighter than expected, stronger private demand growth, and the Middle East conflict.
• US inflation pipeline pressures persisted: the Producer Price Index rose 0.7% in February, while the ISM Services PMI hit 56.1 (highest since July 2022) – readings that complicate hopes for further rate cuts.
• US jobs market weakened: the economy shed 92,000 jobs in February, well worse than the 50,000 forecast, with severe weather and a healthcare worker strike contributing.

The Iran conflict is now the dominant variable. Everything else – inflation, policy, earnings – is being filtered through the lens of energy supply and geopolitical risk.

Macro overview

The central tension in March’s data is the gap between what was happening before the conflict and what the conflict may now cause.

In the US, the inflation trajectory was encouraging – headline CPI at 2.4% and a stable labour market had the Fed in a reasonable position. The February jobs report muddied that picture, but one month of weather- and strike-affected data is not a trend. The bigger concern is services PMI at 56.1 and wholesale prices jumping 0.7%, suggesting underlying demand remains firm enough to keep the Fed cautious, even before the energy shock.

China delivered genuinely strong data. Export growth of 21.8% and a record trade surplus point to resilient external demand, while domestic activity held up through the holiday period. Australia’s RBA rate hike to 4.1% signals the board sees domestic demand as too strong to risk easing, putting Australia on a different policy path to most developed economies.

The positive signals from Japan, the UK and the Eurozone are worth noting – broad-based improvement in business confidence across major economies is unusual and suggests underlying demand is healthier than headlines imply.

Asset class outlooks

Equities: The base case rests on solid company profits, government spending support, and the lagged benefits of last year’s rate cuts. The Iran conflict introduces a material risk premium – higher energy costs squeeze margins and consumer spending power simultaneously. If contained, the pull-back creates opportunity. If it escalates, earnings expectations need to come down.

Fixed income: Cooling inflation and geopolitical risk pull in opposite directions. The Fed’s hold-and-watch stance keeps front-end yields attractive. In Australia, the RBA hike reprices the curve and favours shorter duration. Credit spreads are likely to widen if the conflict persists.

Alternatives and real assets: Energy infrastructure and supply chain resilience have moved from structural themes to near-term priorities. Gold and commodities linked to supply disruption benefit from the geopolitical premium. Real assets continue to stabilise portfolios when volatility is driven by supply-side shocks.

FX: The Australian dollar is caught between a hawkish RBA (supportive) and commodity price volatility (uncertain). Globally, policy divergence remains the dominant driver, with the conflict adding a safe-haven bid to the US dollar and yen.

Positioning considerations

March reinforced three principles: geopolitical shocks transmit through energy and inflation first – the Iran conflict’s impact is about oil supply, shipping costs, and central bank flexibility, not just sentiment. Second, the starting point matters – the global economy entered this period with solid profits, healthy balance sheets, and supportive fiscal settings, which provides a buffer. Third, cash is a position, not a default – our increased cash holdings reflect the wider range of outcomes, not a bearish view on risk assets over the medium term.

Scenarios and probabilities

Scenario probabilities reflect our current assessment and are reviewed as new data emerges.

Base case — 75%

The constructive backdrop – solid company profits, supportive fiscal spending, and relatively loose financial conditions – is now being tested by the Iran conflict. Higher energy prices are pushing up costs across the economy, and we have prudently increased cash holdings in response.

We entered this period from a position of relative strength. Healthy earnings, ample oil supply heading into the conflict, and the lagged benefits of last year’s rate cuts provide a reasonable foundation for recovery, should the disruption be contained. Central banks face a difficult balancing act – with both the US Fed and the RBA focused more on inflation mandates than employment support, we would need a shift in messaging before becoming more confident in monetary policy as a tailwind.

Liquidity remains critical, and structural themes including AI investment, manufacturing reshoring, and energy infrastructure remain supportive longer term. A modestly more defensive position is warranted, but earnings resilience, fiscal support, and lagged monetary easing provide a reasonable foundation for risk assets within a more volatile environment.

Bear case — 13%

The downside centres on a meaningful slowdown in consumer spending, particularly in the US. If households pull back, company revenues come under pressure at a time when valuations are already elevated. The longer the Iran conflict disrupts oil supply and global supply chains, the more likely this scenario becomes.

A sustained spike in oil prices – say 50 to 100% above recent levels – would feed directly into consumer prices and squeeze corporate margins as demand softens. This stagflationary mix is historically one of the most difficult for both shares and bonds. Central banks may be unable to cut rates even as the economy slows, while high government debt limits fiscal stimulus capacity. China adds further risk – if the property sector deteriorates and stimulus fails to restore confidence, growth could slow materially, with direct consequences for Australian national income. In this environment, higher cash, reduced equity exposure, and a tilt toward healthcare, consumer staples, and utilities would be warranted.

Bull case — 12%

The most positive scenario sees the Iran conflict end quickly, with a peace dividend following. Falling energy prices, easing supply chain pressures, and improving diplomacy lift growth while keeping inflation in check. Company profits grow strongly as lower input costs and firm consumer demand support margins, while AI and productivity-enhancing technologies lift output across industries.

Strong household and business balance sheets mean consumers and companies are well placed to respond. For Australia, government spending and rate cuts that began in 2025 support domestic growth. If rates remain below inflation, financial conditions stay loose, supporting investment and asset prices. This scenario supports a growth-oriented portfolio with low cash and increasing exposure to cyclical sectors such as industrials, materials, and financials.

Closing perspective

The Iran conflict reshaped March’s operating environment, and its consequences through energy prices, supply chains, and inflation expectations will take time to play out. But the underlying data – from cooling US inflation to surging Chinese exports to improving business confidence across Europe and Japan – suggests the global economy is not as fragile as the headlines imply. Stay constructive with appropriate caution, keep enough liquidity to act, and treat dislocations as opportunities rather than reasons to retreat.

This publication is prepared by Akambo Pty Ltd (ABN 16 123 078 900) AFSL 322056.

The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.

Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo’s Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.

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