Investment market update, Q3 2026

In this episode of Exploring Super we are joined by one of ESSSuper’s Investment managers, Alex Ng, for economic and market insight for January to March 2026. 

_____________

This podcast is of a general nature only and does not consider your personal circumstances, financial needs or objectives. Before acting on any advice contained in this podcast, please download and read the relevant Product Disclosure Statement and Target Market Determination, found on our website: esssuper.com.au. 

Investment returns cannot be guaranteed, past performance is not indictive of future performance. 

 SuperRatings is a third-party superannuation research company providing data analysis, information and commentary to both the public and the superannuation industry. Refer to superratings.com.au for more information.

Transcript

00:00:02 

You're listening to Exploring Super, the exclusive podcast for ESS Super members. 

00:00:11 

Welcome to Exploring Super, the exclusive podcast for ESS Super members. 

00:00:16 

My name is Christian Kueng and I'm the Manager of Member Education. 

00:00:19 

Today we're joined by Alex Ng, an Investment Manager here at ESS Super. 

00:00:22 

Welcome Alex. 

00:00:24 

Thanks for having me. 

00:00:25 

Excellent, mate. 

00:00:26 

Excellent. 

00:00:27 

So what we'll do, we'll start off with some of the key movements in investment markets over the third quarter of the financial year 25-26, which ended 31st of March. 

00:00:36 

And what's the change since then? 

00:00:38 

The 3 months to 31 March 2026 was defined by the escalation of the conflict in the Middle East and its direct impact on global energy markets. 

00:00:48 

Oil prices surged significantly over the quarter, which is extraordinary by any historical measure. 

00:00:54 

Yeah. 

00:00:55 

The knock-on effect across financial markets was material. 

00:00:59 

Global equity markets sold off broadly. 

00:01:02 

The Australian equity markets fell around 2% for the quarter, with the month of March itself seeing a particularly sharp decline of 7%. 

00:01:10 

Developed markets, global equities in Australian dollar terms fell 6% for the quarter. 

00:01:16 

Fixed income was also challenging. 

00:01:19 

Australian bond yields rose sharply during the quarter, 

00:01:22 

with a 10-year government bond yield reaching 5% by end of March, up from around 4.7% in February. 

00:01:30 

Gold was one of the better performers, up nearly 7% for the quarter and around 41% over the past year. 

00:01:37 

Wow, that's amazing. 

00:01:38 

The Australian dollar also held up relatively well, finishing the quarter about 2% stronger against the US dollar for the three months. 

00:01:47 

Post-31 March, 

00:01:49 

Equity markets have rebounded strongly, led by the US, with the S&P 500 and NASDAQ hitting new all-time highs. 

00:01:56 

The situation remains fluid, and we are closely monitoring developments and positioned to respond as conditions develop. 

00:02:04 

Oh, well, Alex, thanks for sharing those key movements. 

00:02:06 

So you mentioned the Middle East conflict there. 

00:02:08 

What have been some other flow-on effects from this major global event? 

00:02:12 

The critical issue is the disruption of shipping through the Strait of Hormuz. 

00:02:17 

This is one of the world's most strategically vital waterways. 

00:02:20 

The International Energy Agency estimates that around 25% of all global seaborne oil trade passed through the strait in 2025. 

00:02:30 

Wow. 

00:02:30 

With roughly 80% of that destined for Asia. 

00:02:34 

Around 20% of global LNG trade also transits the strait, with about 90% of that bound for Asia. 

00:02:42 

Okay. 

00:02:42 

So when you disrupt that corridor, 

00:02:44 

you are affecting energy supply to the vast majority of the world's largest energy importing nations. 

00:02:51 

The price response has been dramatic. 

00:02:54 

Oil prices are at levels not seen since the previous major energy shocks. 

00:02:59 

And it's not just oil. 

00:03:00 

Fertilizer-related chemicals, of which an estimated 20 to 30% of global trade transits the Strait, are also being disrupted, which creates additional inflationary pressure through food production costs. 

00:03:15 

For global markets, the key dynamic is what we call a stagflationary shock, that combination of higher inflation and weaker growth that is particularly difficult for central banks to manage. 

00:03:29 

Typically, central banks can look through a temporary oil-driven inflation spike, but the experience of 2022 has made them much more sensitive to the risk of inflation becoming entrenched. 

00:03:41 

That's why we've seen markets rapidly reprice towards expectations of tighter monetary policy globally, even as growth forecasts are being revised down. 

00:03:52 

The effects vary significantly by country. 

00:03:56 

The United States is actually relatively insulated because it is largely energy self-sufficient. 

00:04:02 

It's a net energy producer. 

00:04:05 

The Federal Reserve has kept rates on hold. 

00:04:09 

Europe is more exposed 

00:04:11 

given its energy import dependence. 

00:04:14 

And we've seen the euro depreciate since the conflict escalated as markets priced in the economic headwind. 

00:04:21 

Japan is particularly vulnerable as a major energy importer, though the government has been releasing strategic reserves and implementing fuel price caps to cushion the blow. 

00:04:31 

For Australia, the picture is mixed. 

00:04:34 

Australia is a net energy exporter, 

00:04:37 

We are a major producer and exporter of LNG. 

00:04:40 

Okay, so Alex, LNG, liquefied natural gas, we've mentioned that a few times, that's what you're referring to. 

00:04:45 

Yes. 

00:04:45 

Yep, excellent, thank you. 

00:04:47 

So our energy sector benefits from higher prices and that provides some offset to the economy overall. 

00:04:54 

Okay. 

00:04:55 

Energy companies on the ASX have been performing better than the broader market. 

00:05:00 

However, and this is an important caveat, Australia has very limited domestic oil refining capacity. 

00:05:07 

We are actually a net importer of refined petroleum products, despite being a net energy exporter. 

00:05:14 

That means Australian consumers and businesses are directly exposed to the rise in petrol prices. 

00:05:21 

The Reserve Bank of Australia has raised rates in both February and March by 25 basis points each time, with another 25 basis points increase in May. 

00:05:30 

The cash rate is now sitting at 4.35%. 

00:05:34 

Okay, thanks. 

00:05:35 

So let's change topic a little bit. 

00:05:36 

So what's been the impact of AI on software companies? 

00:05:40 

And how did that change the thesis and impact on share prices? 

00:05:44 

Let me start with what happened to share prices. 

00:05:46 

The software sector, particularly the SaaS, or software as a service segment, has fallen significantly since late October 2025. 

00:05:55 

Some commentators have called this the SaaSpocalypse. 

00:05:59 

Which is quite a dramatic term. 

00:06:01 

Definitely. 

00:06:01 

But it reflects a very real and very significant re-rating of this part of the market. 

00:06:08 

The driver is straightforward, in theory. 

00:06:11 

Even if the ultimate outcome is uncertain in practice, markets are increasingly pricing in the risk that artificial intelligence will replace or dramatically reduce the need for subscription-based software products. 

00:06:25 

Okay. 

00:06:26 

Think about it. 

00:06:27 

Many enterprise software businesses charge substantial money fees for tools that help people do tasks that AI can now increasingly do automatically, or that AI can assist with far more efficiently. 

00:06:42 

Very interesting. 

00:06:43 

If AI models can write codes, draft documents, manage workflows, and analyze data, what happens to the companies charging subscriptions for products that do those same things? 

00:06:55 

That's the question markets started asking very seriously in late 2025. 

00:07:00 

What we are seeing is a differentiated outcome emerging across the sector. 

00:07:05 

Hardware and semiconductor companies, the picks and shovels of the AI revolution, have continued to perform strongly because the demand for the infrastructure to run AI models is enormous and growing. 

00:07:17 

That makes sense. 

00:07:19 

US technology fixed investment spending is going into chips, data centers, and networking equipment. 

00:07:25 

Those businesses are benefiting enormously from AI adoption. 

00:07:30 

The picture for software is more complicated. 

00:07:33 

The companies most at risk are those whose core product is doing something that AI can now do itself. 

00:07:41 

Basic workflow automation, routine data processing, template document creation, 

00:07:47 

Those businesses are genuinely facing disruption. 

00:07:50 

But the companies that are integrating AI into their platform, rather than being replaced by it, are actually finding new growth opportunities. 

00:08:00 

And there are dimensions of software, cybersecurity, complex enterprise integration, industry-specific workflows, compliance, where human oversight and sophisticated systems will remain essential. 

00:08:14 

Microsoft is an example of this complexity. 

00:08:17 

If traditional business applications face real pressure, if AI can replicate many of the functions of Office products, why pay Microsoft the same subscription rate? 

00:08:27 

But at the same time, Microsoft has invested heavily in OpenAI, owns GitHub, the leading code development platform, which is now a primary beneficiary of AI-assisted coding, and its copilot product is actually driving deeper adoption of its core platform. 

00:08:43 

rather than cannibalizing it. 

00:08:45 

Okay. 

00:08:46 

So the same company is simultaneously disrupted and disrupting. 

00:08:51 

Interesting scenario. 

00:08:53 

From A valuation perspective, technology multiples have repriced meaningfully. 

00:08:58 

The US technology sector's forward price-to-earning ratio is now near its long-run historical average, whereas it has been trading at extreme premiums previously. 

00:09:08 

Our overall view is that the medium-term growth potential for technology broadly remains substantial. 

00:09:16 

AI is genuinely transformative, but you need to be very careful about which parts of the sector you're exposed to. 

00:09:22 

That makes a lot of sense there, Alex. 

00:09:24 

So to change tact again, what effects does the recent federal budget play on our investment markets? 

00:09:30 

There was no meaningful cost of living relief in the budget to add to the reduction in fuel excise. 

00:09:36 

Okay. 

00:09:36 

There was a small permanent working Australia tax offset of up to $250, but this only starts in 2027-28 and applies only to wages, 

00:09:47 

not investment income. 

00:09:49 

Okay, so we have to wait for next year for that one? 

00:09:51 

The most significant measures in this budget are the tax changes. 

00:09:54 

There are three components here. 

00:09:56 

Let me walk through each of them. 

00:09:58 

Thanks. 

00:09:58 

First, capital gains tax. 

00:10:01 

From 1 July 2027, the 50% capital gains tax discount is being replaced by cost-based indexation for all assets, with a 30% minimum effective tax rate on capital gains. 

00:10:13 

Okay. 

00:10:14 

The 30% floor is specifically designed to prevent people from timing asset sales for periods of low marginal income, essentially closing a tax planning strategy. 

00:10:27 

Yep. 

00:10:27 

For existing owners, there's a transitional provision allowing a valuation as at 1 July 2027 to set the base for the old method before the new index approach kicks in. 

00:10:40 

Okay. 

00:10:41 

Importantly for our members, and this is the headline for a super fund, superannuation funds retain their existing one-third discount on capital gains. 

00:10:51 

ESS Super's investment approach is not directly affected. 

00:10:55 

Oh, that's pleasing to hear. 

00:10:56 

Second, negative gearing. 

00:10:58 

From budget night, new purchasers of established residential properties lose the ability to negatively gear against non-property income. 

00:11:07 

Existing investors are grandfathered, so they are 

00:11:10 

no forced selling. 

00:11:12 

Yeah, there's been a lot of news about that one, definitely. 

00:11:14 

Third, discretionary trusts will face a minimum tax rate of 30% from 1 July 2028. 

00:11:21 

This is primarily a revenue measure targeting high income earners who have used family trust to split income. 

00:11:28 

And so the market impact should be relatively contained. 

00:11:31 

On the housing supply and infrastructure, the government will invest infrastructure to enable housing. 

00:11:37 

aiming to support the development of approximately 65,000 new homes over the decade. 

00:11:42 

Yeah. 

00:11:43 

On the spending side, the most significant commitment is defense. 

00:11:46 

Public hospitals will also receive additional funding. 

00:11:49 

Okay, thanks for that, Alex. 

00:11:51 

So which asset classes performed best and worst over the last quarter? 

00:11:55 

And what were the main drivers behind those outcomes? 

00:11:58 

The performance dispersion across asset classes over the March quarter was quite extreme. 

00:12:03 

It was really a market that reflected the dramatic nature of the oil shock and the broad repricing of risk. 

00:12:10 

Starting with the winners, commodities, and specifically oil and energy, were the standout outperformers. 

00:12:17 

Yeah, so that makes sense with what's going on here. 

00:12:19 

Crude oil prices increased by over 50% in March alone and approximately 80% over the three months. 

00:12:25 

Wow. 

00:12:26 

Holding energy sector equities or commodity-linked assets had significant tailwind. 

00:12:33 

Gold was also a strong performer, up nearly 7% for the quarter and over 40% for the year. 

00:12:40 

Now for the underperformers. 

00:12:42 

And unfortunately, this is where most of the portfolio action happened. 

00:12:46 

Australian listed property was an underperforming asset class, down 16% for the quarter. 

00:12:52 

That's a big movement. 

00:12:53 

Property is highly sensitive to interest rates. 

00:12:56 

Its valuations are essentially driven by discounting future rental 

00:13:01 

income streams, and when bond yields rise sharply, that discount rate increases and prices fall. 

00:13:08 

Australian small caps were also very big, down about 11% for the quarter. 

00:13:13 

Small caps are typically more sensitive to domestic economic conditions, have higher borrowing costs as a proportion of their value, and are less liquid, all of which means investors exceed them quickly 

00:13:26 

when risk appetite deteriorates. 

00:13:28 

Thanks, Alex. 

00:13:29 

So that's quite a significant movement there on small caps for the quarter. 

00:13:32 

Would you mind giving our members a bit of an explanation of what do you mean by small caps? 

00:13:36 

Small caps are typically defined by the ASX Small Ordinaries Index, and that's a benchmark index for Australian small caps. 

00:13:44 

It covers companies rank 101 to 300 by market cap on the ASX 300 index. 

00:13:52 

So small organisations. 

00:13:56 

So while it's called small caps, they are not exactly tiny small, they are still, they are the smaller 200 of the largest 300 on the Australian stock exchange. 

00:14:07 

Okay, that makes sense. 

00:14:07 

Thanks for clarifying. 

00:14:08 

International developed markets equities broadly fell around 6% in Australian dollar terms, with Japan and Europe hit harder than the US. 

00:14:17 

The NASDAQ fell 7% in US dollar terms as the software sector correction I mentioned earlier continued. 

00:14:25 

Fixed income also delivered negative return for the quarter with rising bond yields over the quarter. 

00:14:31 

Rising bond yields mean falling bond prices. 

00:14:35 

The exception was very short duration cash, which benefited from higher rates. 

00:14:41 

The Australian dollar was actually a relative outperformer among currencies supported by Australia's commodity exports and rising interest rate differentials, ending the quarter up around 2% against the US dollar. 

00:14:54 

Okay, it's pleasing the dollars up there. 

00:14:57 

So how did our investment options perform against their target objectives? 

00:15:00 

And in particular, the balanced growth option. 

00:15:03 

How did that go up until the end of 31 March? 

00:15:06 

As you expect, given what we've just discussed about market conditions, the quarter to 31 March 2026 was a difficult one across the industry. 

00:15:14 

For the quarter itself, the January to March period, 

00:15:18 

Conditions were difficult across all equity-oriented options. 

00:15:22 

The balanced growth option, our option targeting CPI plus 3.25% per annum, returned negative 1.45% for the quarter. 

00:15:31 

On the positive side for the quarter, our property and infrastructure holdings provided a partial offset, contributing positively to the options return and helping cushion the equity-driven weakness. 

00:15:43 

This is a good example of why diversification across real assets, infrastructure, and alternative methods. 

00:15:50 

Those asset classes did their job as diversifiers in a difficult environment. 

00:15:56 

The balanced growth option returned 9.15% for the 12 months to 31 March 2026. 

00:16:03 

Over three years, it returned 9.97% per annum, and over five years, 8.36% per annum. 

00:16:11 

So the long-term track record for balance growth is strong and it's meeting members' needs as it is outperforming its investment objectives. 

00:16:19 

Okay, so that's really strong returns there. 

00:16:21 

And just to clarify, Alex, these are for the accumulation plan, the beneficiary accounts, etc., working income stream. 

00:16:26 

These are not retirement income stream returns. 

00:16:28 

These are accumulated returns. 

00:16:30 

Yes, that's correct. 

00:16:31 

Oh, fantastic. 

00:16:32 

Thank you very much again for coming in today, Alex, and sharing your insights. 

00:16:35 

Thanks for having me, Christian. 

00:16:37 

You're very welcome. 

00:16:38 

Very welcome. 

00:16:38 

Look forward to having you on again soon. 

00:16:40 

Now that wraps up today's episode of Exploring Super, the exclusive podcast for ESS Super members. 

00:16:46 

We look forward to producing more content for you at ESS Super, proudly serving our members. 

00:16:51 

If you'd like more information about our investments and products, please go to ESSuper.com.au. 

00:16:59 

This podcast is of a general nature only and does not consider your personal circumstances, financial needs, or objectives. 

00:17:07 

Before acting on any advice contained in this podcast, please download and read the relevant product disclosure statement and target market determination found on our website, essuper.com.au. 

00:17:20 

Investment returns cannot be guaranteed. 

00:17:23 

Past performance is not indicative of future performance. 

00:17:27 

Super Ratings is a third-party superannuation research company, providing data analysis, information and commentary on both the public and the superannuation industry. 

00:17:36 

Refer to superratings.com.au for more information.