Staying Disciplined in Volatile Markets
Global markets are currently navigating heightened geopolitical tension, particularly surrounding the conflict involving Israel and Iran. These events can understandably create concern for investors, especially when energy prices rise and news headlines become more alarming.
While uncertainty can lead to short-term market volatility, history consistently reminds us that markets tend to recover more quickly than expected. As long-term investors, our focus remains on maintaining discipline, managing risk, and identifying opportunities when markets become unsettled.
Below we outline the key developments shaping markets and how we are positioning portfolios.
Wars Are Typically a Buying Opportunity
History shows that while wars and geopolitical conflicts initially shock financial markets, they rarely cause long-term damage to diversified investment portfolios.
Historically:
- Rapid Recovery: On average, share markets tend to bottom within roughly three weeks and recover to pre-conflict levels within six to seven weeks.
- One-Year Returns: The US share market (S&P 500) has historically been higher one year after the start of a conflict roughly 70% of the time, often delivering double-digit returns.
This does not mean markets will avoid volatility in the short term, but it highlights an important lesson: periods of fear and uncertainty have often proven to be opportunities for patient investors.
Why This Conflict Is Impacting Markets More Quickly
The current conflict is being felt more immediately because of the impact on global oil supply.
Approximately 20% of oil supply has been removed from the market, while increased production from OPEC and Russia is estimated to replace only around 5% of the shortfall.
Because oil sits at the centre of the global economy, increases in energy prices tend to flow quickly into:
- Freight and transport costs;
- Manufacturing expenses; and
- Consumer prices
If the conflict continues longer than initially expected, the damage to oil and gas infrastructure could lead to renewed inflation pressures globally.
Early expectations suggested the conflict might last around four weeks, then eight weeks, and current estimates are now approaching 100 days. The longer the conflict continues, the greater the potential inflation impact.
Inflation and Interest Rate Implications
Rising petrol prices effectively act like an interest rate increase for households and businesses.
Higher energy costs reduce disposable income and consumer spending, which can slow economic activity.
In Australia, this may actually provide a temporary pause for the Reserve Bank of Australia (RBA) as policymakers assess how higher energy costs impact the economy before considering further rate increases.
How PCM Portfolios Are Positioned
In recent months, PCM portfolios have maintained a slightly more defensive tilt, including:
- Higher allocations to bonds;
- Tactical cash holdings; and
- Slightly reduced exposure to high-growth sectors.
This positioning has helped cushion portfolios from market volatility.
However, given the long-term investment horizon of superannuation portfolios, we believe it is appropriate to begin gradually deploying some of this tactical cash into growth assets.
We may also rebalance some conservative positions toward growth assets where valuations become attractive.
In an environment where inflation may remain elevated, value-oriented investments and income-producing assets continue to play an important role in portfolio construction.
Strong Australian Earnings
Despite global uncertainty, the February reporting season in Australia was very strong.
Many companies reported earnings that exceeded expectations, contributing to the strong start to the year for Australian share markets.
While some sectors such as retailers may face pressure if inflation remains elevated, the broader Australian economy remains relatively resilient.
This reinforces our view that market pullbacks should be viewed as opportunities to invest gradually and maintain long-term discipline.
Oil Markets and Potential Risks
Oil prices are currently showing similar patterns to those seen during the Russia-Ukraine conflict in 2022.
At this stage, we have not yet seen widespread spillover into all parts of financial markets.
A worst-case scenario would resemble 2022, when both shares and bonds declined by around 20% simultaneously.
However, such an outcome would likely require a significant escalation in global conflict. Major global economies remain strongly incentivised to avoid this scenario given the importance of economic stability for their populations.
Risks in the Private Credit Market
Another area receiving attention is the US private credit markets. Recent developments have highlighted some concerns, including:
- Liquidity support being provided by managers such as Blackstone;
- Certain loans being written down dramatically in short periods; and
- The introduction of redemption limits and withdrawal gates in some private credit funds.
These developments suggest that some lending practices may have become overly aggressive.
Importantly, PCM portfolios do not allocate to private credit strategies, as we prefer investment structures that provide greater transparency and liquidity.
China’s Slowing Growth
China has also recently acknowledged a slowdown in its economy, reducing its growth target from 5% to approximately 4.5%.
Given China’s importance to global trade and the Australian economy, slower growth can create some headwinds for global markets and commodity demand.
Outlook for the Year Ahead
We expect 2026 to remain a year of volatility, with markets responding to geopolitical developments, inflation trends, and economic policy decisions.
However, our base case remains that markets will gradually trend higher over time.
In this environment, the importance of total returns becomes increasingly significant. Portfolio growth will likely come from a combination of:
- Dividend income;
- Interest income; and
- Long-term capital growth.
These income streams help portfolios continue to grow even when markets experience short-term fluctuations.
The Key Message for Investors
Periods of uncertainty can feel uncomfortable, but history consistently shows that panic selling often leads to poor long-term outcomes.
Disciplined investors who maintain diversified portfolios and continue investing during market weakness are often rewarded over time.
Our approach remains focused on:
- Maintaining diversification;
- Managing risk; and
- Taking advantage of opportunities when markets become overly pessimistic.
