The ongoing conflict in the Middle East, marked by an unsteady ceasefire and a blockade of the Strait of Hormuz, has cast a long shadow of uncertainty over the Australian sharemarket and the broader economy. With consumer sentiment already souring, inflation on the rise, and further interest rate increases looming, the S&P/ASX 200 is bracing for a challenging period. Economists are warning of a potential recession if a long-term resolution between the Trump administration and Tehran cannot be found.
Investors are navigating a complex landscape where market valuations are notably stretched. Richard Schellbach, an equities strategist at UBS, highlights that the price-to-earnings ratio for Australian stocks, at 22.7 times on February 28, was higher than during previous geopolitical shocks. This elevated valuation, combined with slowing growth and potential rate hikes, presents a significant challenge, according to Perpetual’s Matt Sherwood. The impact on oil prices has been substantial, with Morningstar market strategist Lochlan Halloway noting current Brent Crude gains rival those seen during the Gulf War, an event historically linked to lasting negative performance on the ASX 200.
Rising oil costs are also exacerbating Australia’s inflation problem, which pre-dated the Middle East conflict. Automotive fuel, previously a negative contributor to annual goods inflation, now threatens one of its few pressure valves. Judo Bank’s Warren Hogan cautions that an “intense inflationary impulse” from the energy shock will necessitate a more substantial tightening of policy. Despite these concerns, Schellbach points to the Australian economy’s halved oil intensity over the last 40 years, suggesting energy shocks may have less impact than previously. Sherwood also believes energy prices may have found a ceiling, expecting oil to end the year around US$85 a barrel even with peace. Market diversification away from mining and consistent earnings growth contribute to its resilience, with Schellbach considering stagflation triggering a major share pullback an “extreme and tail risk.”
