Greetings,
Geopolitical Tensions
News over the last few weeks has been dominated by the war in Iran, with equities broadly following the price of oil, both up and down. At this stage, there appears to be a very fragile ceasefire, broadly revolving around the opening of the Straits of Hormuz as part of a wider 4D game of geopolitical chess centred on access to oil.
It does look like the US strategy has evolved from military intervention to the financial strangulation of Iran, which may lead to regime change. The US is now the largest exporter of oil and is relatively immune from the immediate issues in the region; however, there are significant impacts for China and India, both of whom have very large populations that need access to energy to function properly.
No doubt there will be further arm‑wrestling and negotiations over the next few days, with a resolution expected swiftly, as this situation is materially slowing global economic growth. The reality is that the effective closure of the Strait of Hormuz has disrupted roughly 13% of global oil supply and has caused sharp increases in energy prices and fertiliser shortages, which in turn increase inflationary pressures throughout the global economy.
Oil Production By Country
Source: Statista
Global Economic Growth Forecasts
Unsurprisingly, this has led to the International Monetary Fund downgrading its global growth forecast from 3.3% down to as low as 2.5% if the conflict drags on, with concerns that if inflation remains elevated, central banks will need to lift interest rates. This would be counterproductive to getting economies operating at maximum efficiency in the longer term.
The IMF has considered three different scenarios depending on the length of the war and its impact on the wider economy, which I think is well understood by politicians both here and overseas. On a more positive note, the rapid uptake of AI is certainly helping businesses provide more efficient services, leading to improved productivity, at least in the private sector.
The hope is that the conflict can be resolved quickly that the current increase in inflation will be temporary, and that reserve banks can hold off on making interest rate rises that would need to be reversed at a later stage. In the immediate term, there is a natural lack of confidence in the business community, with decisions being delayed until there is greater clarity around the resolution of the conflict.
Global Growth and Inflation Forecasts (%)
Source: IMF staff estimates
Australian Equities
After an initial sharp sell‑down at the beginning of the conflict, markets rebounded quite strongly, supported by significant dividend payments from the interim earnings season. With strong investment flows coming from superannuation contributions into Australian equities, and a limited amount of choice on the ASX, the overall index is now only a couple of percent off an all‑time high.
Much of the company messaging at the moment is around using AI to drive efficiency and reduce cost bases rather than generating additional revenue. This is particularly reflected in the financial services sector, with banks such as Bendigo looking to outsource much of their basic work, reducing staffing levels by around 8%. I expect this trend to continue, with the wider social implications needing to be thought through carefully.
At this stage, there are very few new, quality IPOs on the Australian stock market and a growing desire for companies to be owned by private equity, which are then not subject to continuous disclosure rules. The practical effect of this is that it puts a floor under the overall index, limiting any significant falls or prolonged downturns.
Global Equities
Perhaps counterintuitively, US equity markets are at new all‑time highs, driven by optimism that the uptake of technology will lead to more profitable businesses, particularly in the mid‑market, while largely overlooking short‑term volatility in oil prices.
The US President appears to regard stock market performance as a key indicator of his personal success, which may place a cap on any significant market downturns caused by global disputes and could be contributing to some questionable trades on the share market. There are, of course, the 2026 midterm elections coming up later in the year, so expect political decisions over the coming months to reflect this.
A thriving economy and manageable interest rates are an important recipe for political success, along with a focus on domestic priorities, so expect the US to make this its focus. Again, much of the growth has come from the “Magnificent 7” technology stocks, but expectations are now that the users of these technologies will significantly improve productivity, and therefore earnings and share prices, over the next few reporting seasons.
United States Stock Market index (12 Months)
Source: Trading Economics
Upcoming Australian Budget
The next Australian Federal Budget will be on Tuesday, 12 May, and as usual we will provide a full summary. There has been a fair bit of market commentary regarding possible changes to capital gains tax on investment properties on a prospective basis.
There are a number of levers the government could use, such as limiting the number of properties or the dollar amounts eligible for capital gains tax discounts. The reality remains that Australia has a supply‑based problem in the property sector, and until this is resolved it is unlikely that existing properties would be materially affected by changes to federal tax policy, though rents would likely rise.
A better strategy would be to focus on national productivity and leverage our unique advantages to generate prosperity for all, while keeping debt levels manageable. This requires a commitment to innovation and a focus on the future, rather than attempting to protect outdated work practices of the past.
There are immediate cost‑of‑living issues within the community, primarily driven by increases in fuel costs and their flow‑on effect to food and vegetable prices. As a result, expect some short‑term government relief measures and a probable delay in making major structural decisions until the global economic outlook becomes clearer.
Domestic Property
This remains by far Australia’s largest asset class, with the sale of the family home excluded from capital gains tax. As such, it is a defensive asset supported by net migration of around 2% per annum and is therefore relatively well shielded from global market volatility.
While interest rates have risen twice this year, the RBA will continue to balance inflation expectations with full employment, aiming to minimise surprises. Overall, interest rates are close to neutral – neither particularly accommodative nor restrictive – offering a reasonable return on savings while mortgage payments remain around historical averages.
Changes in employment practices towards more flexible but contract‑based arrangements may make mortgage approvals more challenging, as will the swift uptake of AI in white‑collar sectors. This may lead to opportunities to enter the property market where there are early signs of forced selling.
Ultimately, net migration has driven property prices in Australia higher over many decades, and while government policy may introduce adjustments, the long‑term outlook remains solid. Australia continues to be one of the world’s most desirable countries to live in and migrate to.
Australian Home Price Growth
Source: Proptrack
Our News
Client enquiries have been very calm over the last few weeks, as we have experienced global disruptions many times before. Where we have discretion, we are currently holding higher levels of cash for clients.
If you require additional income from your account, please let us know, as in most cases this can be accommodated on a one‑off basis. If you have any concerns, as always, feel free to contact us directly via email. This extends to your family members and friends, particularly those who are not currently advised and would benefit from a safe pair of hands to help manage their financial affairs.
Sincerely,
Tony and Fiona
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