Monthly Market Insight | Iran War Update

MARCH 2026

KEY POINTS: 

·         The war in Iran continues, with equity markets grinding a little lower and oil prices a little higher in the three weeks since our last update.

·         There have been some positive developments on the supply side, with some tanker traffic being permitted to cross the Strait of Hormuz and a ramp-up in Saudi Arabia’s East-West oil pipeline.

·         Asian economies remain the most exposed to higher energy prices and supply shortages, with the US economy likely to fare better. Australia could see some supply disruption due to lack of domestic storage and refining capacity, but ultimately as a rich country we should be able to ensure continued energy supply.

·         With the conflict continuing as it has, and oil prices remaining where they currently are, we think there will be a moderate negative shock to global economic growth, but think the impact on corporate earnings (particularly in the USA) will be limited. As a result, we don’t expect a protracted bear market as our base case.

·         The portfolios remain overweight growth assets, but we are monitoring the situation closely and if the situation changes for the worse we will adjust the portfolios in response. 

It has been around three weeks since our last update on the Iran War.  Since then, global oil prices have ground higher (though remain below intraday peaks) on continued supply disruption through the Strait of Hormuz. In line with this, markets have sold off a little more, with most global indexes around correction territory now - around a 10% drawdown versus a 3%-5% drawdown a few weeks ago. While a 10% drawdown feels significant, especially considering the sheer bulk of negative news flow and sentiment surrounding the war, they are relatively common (see below).

We would generally aim to be able to preserve capital in drawdowns greater than 20% (a bear market), which are much less frequent and generally tied to more substantial macroeconomic shocks (Covid and the 2022 rate hiking cycle and subsequent recession fears being good examples of this). Still, the war isn’t over and a bit more market weakness from here is our base case view unless there is a relatively swift resolution. In addition, a more meaningful drawdown into bear market territory, while not our base case, is a risk.  

The Positive News

The best news since the start of the conflict is that the disruption to global oil supply is not as great as initially feared. With the Strait of Hormuz closed, back of the envelope estimates indicated that roughly 20% of global oil supply (or 20mb/d) would be removed from the market. However, since then Saudi authorities have announced that their East-West crude pipeline is now operating at its maximum capacity of around 7mb/d, most of which is being made available for export. Additionally, some tankers tied to Iran friendly regimes have passed through the Strait either with permission (including via toll payments) from Iran authorities or covertly via turning off their automatic identification system (AIS). This has taken the hit to global supply to around 12%, rather than the originally feared 20%.

Another positive development has been the gradual reduction in daily attacks from Iran on its neighbours. The biggest risk of the Iran War for global markets is not that Iran attempts to close the Strait permanently (which just isn’t possible given relative miliary capacity between Iran and the rest of the world), it is that it significantly damages regional energy infrastructure, which could disrupt global supply for years. We saw the risk of this when Israel attacked Iran’s Asaluyeh complex (onshore processing for the South Pars gas field), Iran swiftly responded by attacking Qatar’s Ras Laffan Industrial City (the world's biggest LNG export complex) reportedly destroying 17% of Qatar’s LNG export capacity for around five years (estimated repair time).

Finally, Iran’s capacity to attack its neighbours and shipping has been degraded meaningfully via US and Israeli attacks on its military industrial capacity, which have continued apace over the past few weeks.

The Negative News

The negative news, other than the war continues, is primarily regional rather than global. In March, we have seen weakness emerge in our Global Growth Barometer, driven by Europe, Asia and Australia. The United States has been extremely resilient. Economic data for March is still relatively sparse, so the current read is somewhat inconclusive, but it is something we are watching closely.

That the weakness is concentrated in Asia, Europe and Australia isn’t surprising when you look at where oil from the Strait is shipped. The vast majority heads towards Asia. In an oil price shock, it is not unreasonable to assume the regions which are heavily dependent on energy imports (Asia and Europe) would be hit hardest.

Indeed, some of the literature modelling oil prices and economic activity suggest that the US economy isn’t really impacted by higher oil prices (see below). This is vastly different from the US economy of the 1970s or even pre-Financial Crisis.

The other major cost will be humanitarian. Higher energy prices are a more meaningful share of consumption baskets in poorer and middle income countries, so households will have to cut back spending or power usage more significantly. If the Strait of Hormuz is closed for a more meaningful period of time global food staple prices are likely to go much higher. Natural gas is a precursor to fertiliser production and a lack of fertiliser means lower crop yields, higher food prices and ultimately calorie deficits and starvation in very poor countries. While this is a humanitarian tragedy, this is unlikely to have impact on markets.

Will Australia Run Out of Fuel?

Australia is a bit of an unusual case here. Australia produces nearly 4x the energy it consumes (see below), exporting the excess to the rest of the world and generally benefiting from higher prices via a positive terms of trade shock.

However, Australia doesn’t produce much oil, has very limited domestic refining capacity and among rich countries, has extremely limited energy storage capacity (around 30 – 40 days’ supply). There is some risk of fuel shortages and rationing in Australia. Some petrol stations have run out of diesel (mainly), though there always seems to be an alternative station nearby to fill-up. The economic risk isn’t really that large at the household level. Fuel prices have risen around 40%, but many households can adjust their demand with simple lifestyle changes. Driving at 80kph rather than 110kph on a highway drops fuel consumption by around 25%. Public transportation is an option for many. Office workers can work from home a bit more than normal. Driving holidays can be delayed. Whether they will adjust their behaviour is yet to be seen. Australia is a rich enough country that most are happy to pay the extra fuel cost to drive the speed limit.

Shortages have been more prevalent in industry. Farms and mine sites which traditionally bulk order diesel have been struggling to get their orders met. Ultimately though, ongoing widespread shortages due to lack of refining capacity are a relatively low risk. Australia is a very wealthy country compared to others in the region. Simply put, we can afford to pay much more for refined products than Indonesia or the Philippines. The actual shortages are more likely to be felt in countries with less capacity to pay.

Market Outlook

So far, the market reaction to the conflict has been relatively limited. Most market participants think the conflict (or at least impaired shipping through the Strait) will not be enduring. That’s not an unreasonable assumption. The stated war goal of the US administration is not regime change. There is talk about negotiations. Iran has allowed some shipping through safely.

Global oil supply is currently hindered by ~10% with navigation through the Strait limited. Demand elasticity estimates vary quite a bit, in the very short run could be as low as -0.1, but -0.25 is closer to the current consensus. At that elasticity, a 40% increase in the price of oil reduces demand sufficiently to clear the market. As time horizons lengthen, that elasticity will probably be higher (the marginal new vehicle is an EV etc). That said, if there is no increase in throughput from the Strait, $100 per barrel is a reasonable back of the envelope based on the above. Most macro models would model this price increase as around a ½% reduction in global GDP growth, with Asia and Europe more heavily impacted than the USA given relative differences in energy dependence.

Those sort of numbers aren’t catastrophic for global equity markets, particularly because the US economy is more insulated and is such a large weight in the global equity index. Earnings revisions remain positive (see below). Credit spreads are still tight. Aside from high energy prices and a correction in equities, the market doesn’t seem overly worried about a large global growth shock.

At the same time, the correction has flushed out market positioning with most investors now underweight equities (though not by as much as they typically get in a major equity market correction).

Portfolio Positioning

Our portfolios remain overweight global equities and growth overall, and modestly underweight Australian equities. While this feels uncomfortable when equity markets are correcting typically corrections related to geopolitical events are quite short lived. It is very difficult to generate outperformance by trying to time short, sharp corrections, particularly in managed accounts given execution delays. For some context, our portfolio attribution system (Refinitiv Port) reports that the DS 70 portfolio has underperformed its SAA by 0.27% since the conflict began (to 26 March). Compared to the headline noise of the war, this is a relatively minor difference in relative performance, and much less than the 0.8% of outperformance in the previous 3 months.

That said, we are monitoring the situation closely. If the conflict escalated – say for example Iran began to attempt to destroy regional energy infrastructure, rather than simply retaliate to attacks on its own, that would likely lead to oil prices well in excess of where they are now for a protracted period of time. This would have a more meaningful impact on global economic growth and corporate earnings and would likely be a catalyst for a portfolio change.

Advice Disclaimer: This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).