March In Review: Oil Price Up, Shares Down

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This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

After the stand out February reporting season, investors were subjected to a 1970's style oil price shock which set a risk-off waterfall of selling across most of the market.

• The start of US's Epic Fury against Iraq left the ASX200 with only one way to go, down!
• Energy and defensive sectors bucked the trend, with previous outperformers sold down heavily
• Higher bond yields, an RBA rate hike and rising inflation concerns generated an across the board valuation de-rating
• Analysts on the look out for earnings downgrades and commentary ahead of reporting season

By Danielle Ecuyer

February gains wiped out in March

After the ASX200 notched up a 4.1% total return in February, with an overall volatile but better-than-expected February reporting season, March came like a nasty bolt from the blue.

The start of the Israel/US war with Iran resulted in the closing of the globally vital Strait of Hormuz, and thus a sharp rally in Brent crude, up 63% on the prior month to US$118.4/bbl.

Around 20% of global oil consumption goes through the Strait, and 20-25% of global LNG trade, with the UK, Europe, and Australasia the most impacted, hence the relatively higher rise in Brent crude against its West Texas equivalent over the month.

As highlighted by Morgan Stanley, trading patterns over the month reflected the associated “oil shock”, with 1970s-style fears emerging for those with memories old enough to recall the fuel rationing and stagflation over that decade.

While commentators are not immediately gravitating to the ‘stagflation’ scenario, the longer the Strait is closed, the higher the uncertainty around inflationary shocks becoming more embedded into economies.

Elevated oil prices and the discounting of higher inflation were reflected in Australian and global bond yields rising over the month. The Australian 10-year bond peaked near 5%, which underpinned a repricing of monetary policy expectations.

Higher expected interest rates weighed not only on “growth sensitive equities”, as emphasised by Morgan Stanley, but also resulted in a ‘risk-off’ de-rating of stocks and valuations generally.

As identified by Macquarie, a second RBA interest rate hike provided equally a headwind for the domestic market, weighing on sentiment.

The ANZ-Roy Morgan consumer confidence index fell another -4.3 points over March 23-29 to 58.8 points, marking the lowest reading since records began in 1973, beating the previous all-time low recorded in the week prior.

Not surprisingly, weekly inflation expectations rose 0.4 points to 7.3%, while the four-week moving average rose to 6.8% from 6.3%.

The index only tells part of the month’s story

Against this backdrop, it is hardly surprising the Australian market declined -7.1% (total return), -7.4% in absolute terms (ex-dividends), with the Financials and Materials accounting together for a circa -560bps drag on the ASX200, marking a 180-degree reversal from the prior month’s outperformance.

While individual portfolios may have felt more like a brutal bear market, the ASX200 index only lost -2.67% in absolute terms for the quarter.

Looking at the global monthly returns in US dollar terms, the MSCI Australia index fell -10% versus the World at -7.1%, with energy-producing countries USA down -4.9% and Canada down -3.4%.

Heavily oil import-dependent countries, which had also strongly outperformed going into the conflict, notably Japan and South Korea, fell by -10.4% and -25.4%, respectively.

Gold and BHP crashed the Materials party

The Materials sector fell -14.1% in absolute price terms (-13.2% incl dividends), even outpacing the more interest rate sensitive sectors of Real Estate, down -11.34%, and Information Technology, down -12.6%.

The largest index weight, BHP Group ((BHP)), was a -125.9bps drag for the month, alongside National Australia Bank ((NAB)), ANZ Bank ((ANZ)) and CommBank ((CBA)).

For Technology, Macquarie notes concerns around ongoing AI disruption risks being compounded by the rise in 10-year bond yields (around 30-35bps over March) and rates rising at the short end.

Both trends are headwinds for valuations of technology and longer duration growth stocks. Shares in WiseTech Global ((WTC))  fell -19.9% and Goodman Group’s ((GMG)) -11.7%.

The sell off in Materials was worsened by the gold sector –the month’s worst performer– down -23.4%.

According to Tony Sycamore at IG, the precious metal declined -11.5% for its worst monthly decline since October 2008 on a stronger US dollar and higher bond yields.

Macquarie calculated gold’s fall as -10.8% and stresses the gold price was still up 50% in the last year.

Gold stocks had been major winners for investors prior to the conflict, so the selling was likely enhanced by portfolios selling the winners.

Northern Star Resources ((NST)) proved the weakest performer in the ASX100, down -32%, compounded by management delivering a cut in FY26 guidance.

Unsurprisingly, Energy was the star performer, with the sector up 18.51% (absolute) and 19.2% in total return. These returns remain below gains in West Texas crude (WTI), up 51%, and KJM LNG, up 88% at the start of the US’s Operation Epic Fury.

That difference suggests markets were not pricing in a prolonged conflict, plus companies endure bottom line impacts too, not only revenue benefits.

The Energy sector has notched up a 12-month total return of nearly 49%, offsetting the March decline in Materials and Financials with a positive 79.7-point impact on the ASX200.

Shares in Viva Energy ((VEA)), up 47%, led the ASX200 over the month, with Woodside Energy Group ((WDS)) shares up 27% as the top performer in the ASX50, adding 52 points, with Santos ((STO)) adding 13.8 points.

Investors rotated to defensive sectors in a risk-off environment

Sectors offering the best defensive positioning included Utilities, up 4.9%, Insurance, up 3.8%, Consumer Staples, up 2.8%, and Telecom, up 2.5%.

Consumer Staples added 5.5 points and Utilities 7.1 points. In terms of individual stocks, Morgan Stanley identifies Coles Group ((COL)) adding 8.8 points, Telstra Group ((TLS)), 6.2 points, and Suncorp Group ((SUN)), 6.2 points.

In contrast, the Healthcare sector, which has historically been viewed as defensive, fell -6.2%, bringing the 12-month total decline to -30.4%, even exceeding Technology’s -28% total negative return.

In quant terms, Macquarie explains Value and Growth stocks had similar returns in March, with Momentum the underperformer, down -10.8%.

Small caps, unsurprisingly, underperformed the ASX100 by nearly -5%, with both Momentum and Small caps generally experiencing more selling pressure in market corrections.

Conversely, they are the first to rebound more swiftly when markets move risk-on in recovery mode.

What’s on the horizon now?

Strategists have now turned their focus to what’s ahead, with UBS noting, when adjusted for inflation, the AUD oil price is not at extreme levels evidenced in the past.

However, this broker also points out the size and the speed of the oil price jump over the last month were “already historic”.

The likely outcome is inflation and growth shocks will affect earnings, with downgrades (after a plethora of upgrades in the February reporting season) expected over the next few weeks.

Morgan Stanley is anticipating companies may start updating on reduced expectations from late April onwards.

Some sectors are faster to downgrade, UBS highlights, as suggested by previous cycles, with a “hard stagflationary” environment generating more broad market EPS downgrades.

Interestingly, the UBS strategist has upgraded Healthcare to overweight as the preferred defensive sector when confronted with oil price shocks. That sector is currently trading on a historically cheap valuations.

Morgan Stanley also points to risks around fuel cost pass-throughs and sees the market’s double digit earnings growth outlook as likely to come under pressure.

The market is currently forecasting 13.6% earnings growth in FY26 and 10.5% for FY27, meaning the March index decline reflected a compression in valuation rather than earnings, with the forward price to earnings multiple down by around -2 PE points to 16.4 times, which aligns with the 10-year average.

This broker emphasises management commentary in the upcoming quarterly updates and out of cycle company earnings reports will be very important in terms of trying to capture the quantitative impacts on earnings and outlook guidance.

Macquarie’s FOMO meter is slightly negative at -0.09 and reached a low of -0.20 in March, with Fear usually measured at -1.0, suggesting a relatively muted response to concerns around the impact of the Iranian conflict.

This broker emphasises the optimal time to Buy stocks is when sentiment is negative, but it is better to Buy risk when sentiment is neutral and not in FOMO territory, such as in January this year.

ASX100 Best and Worst Performers of the month (in %)

ASX200 Best and Worst Performers of the month (in %)

ASX300 Best and Worst Performers of the month (in %)

ALL-TECH Best and Worst Performers of the month (in %)

All index data are ex dividends. Commodities are in USD.

Australia & NZ

The World

Metals & Minerals

Energy

Important note: the charts above are also incorporating the first two days of April.

Technical limitations

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