Middle East conflict, oil shock and KiwiSaver: What the market rally shows. Image / nzherald
Markets have a habit of testing investors’ resolve – and over the past few months, that test has been on full display.
When the Middle East conflict escalated just over two months ago, the initial reaction was exactly what history would suggest. Oil prices surged, risk assets sold off, and uncertainty dominated headlines. For many KiwiSaver investors, checking their balance quickly became an anxious exercise.
But as we wrote at the time, markets don’t wait for outcomes – they price in possibilities. And those possibilities are often far more extreme than what ultimately unfolds.
Fast forward to today, and that principle has been validated in real time.
Despite ongoing geopolitical tension, many global equity markets have made fresh record highs. April delivered the strongest monthly return for global equities since 2020, with the MSCI World Index rising 9.5%, the S&P 500 up over 10%, and the Nasdaq surging more than 15%. This has come even as oil prices spiked 80% (above US$120 per barrel in the case of Brent crude) and headlines remained dominated by conflict.
In other words, markets have climbed a wall of worry.
That resilience has not been random. It has been driven by fundamentals – strong corporate earnings (particularly in technology), continued investment in artificial intelligence, and a global economy that remains more resilient than many expected.
Central banks have also played an important supporting role.
Rather than reacting aggressively to an oil-driven inflation shock, and supply side disruptions, major central banks have broadly adopted a “wait-and-see” approach. The Federal Reserve, European Central Bank, Bank of England, Bank of Japan and Bank of Canada have all held interest rates recently, signalling a more balanced stance as they assess inflation and growth risks. That consistency has helped anchor expectations and support investor sentiment.
The Reserve Bank of New Zealand has taken a similar approach, although the local stock market has not participated in the global rally to the same extent – reflecting a softer domestic backdrop. Even so, the broader global policy setting has been supportive of risk assets.
This is exactly the dynamic long-term investors need to understand.
Short-term volatility is often driven by fear and uncertainty – what might happen. Long-term returns, however, are driven by earnings, innovation, and economic growth – what actually happens.
When markets initially reacted to the conflict, it was easy to assume the worst. Oil supply disruptions, sustained inflation, and weaker growth were all plausible scenarios. But as we highlighted at the start of March, unless those worst-case outcomes materialised, much of that fear would eventually unwind.
That is precisely what has played out.
Energy markets have remained volatile and headline-driven, but equity markets have been far more measured. As it has become clearer that the most severe scenarios may not eventuate, confidence has returned – and markets have responded accordingly.
For those who stayed invested, the rebound has been powerful.
That recovery has also been clearly reflected in the fund performances of many asset managers.
This discipline has been rewarded with markets sticking to a familiar script.
History shows that markets tend to recover well before the news flow improves. The strongest gains often come in short bursts, and missing even a handful of those days can materially impact long-term returns. This is particularly relevant for KiwiSaver, which is designed to build wealth over decades, not weeks.
It also highlights the value of maintaining a long-term perspective during geopolitical events.
As Warren Buffett has often said, macroeconomic and political forecasts can become “expensive distractions”. Wars, crises and recessions are recurring features of history – yet markets have consistently moved higher over time as businesses grow earnings and economies expand.
The current environment is no different.
Even amid conflict, many of the world’s leading companies are delivering strong results. The US earnings season has been particularly robust, with more than 80% of S&P 500 companies (approximately 70% of which have reported to date) beating expectations – well above long-term averages.
Alphabet (Google’s parent) last week reported standout growth, with its cloud division seeing quarterly revenues surge 65% on the back of AI demand. Apple also delivered a blowout quarter, with double-digit revenue growth and the iPhone 17 being the company’s most popular launch ever. Both Alphabet and Apple are long-term structural growth leaders in global markets.
This speaks to a broader truth about how wealth is created.
Over the long term, a relatively small number of high-quality companies have driven a significant share of market returns. Missing exposure to those businesses, often because of short-term fear, can have a lasting impact on outcomes.
For KiwiSaver members, the implication is clear.
Volatility is part of the journey, but it does not, in itself, require action. Unless your personal circumstances have changed (such as your time horizon, income, or tolerance for risk) your investment strategy generally shouldn’t either. Geopolitical events can create a lot of noise, but reacting to that noise by switching funds or moving to cash can often do more harm than good. The discipline to stay invested when nothing fundamental has changed is what underpins long-term success.
The past few months have provided a textbook example.
At the height of uncertainty, the temptation to “do something” can be strong – whether that is switching funds, reducing risk, or moving to cash. But as this recent rebound shows, those decisions can come at a cost if they result in missing the recovery.
In contrast, investors who maintained discipline have been rewarded. Time in the market continues to matter far more than timing the market.
That is not to say risks have disappeared. Inflation remains a factor to watch, particularly if higher energy prices persist. Central banks are navigating a complex environment, and geopolitical uncertainty has not gone away. The situation in Iran remains “fluid” to say the least.
But these risks are not new – and they are not, in themselves, a reason to abandon a long-term investment strategy.
If anything, the recent market performance reinforces the message from March: markets price worst-case scenarios quickly, but they also adjust quickly when those scenarios fail to materialise.
The lesson is a simple one.
Staying invested through periods of uncertainty is not about ignoring risk – it is about recognising that long-term returns are driven by fundamentals, not headlines. Furthermore, in a world where uncertainty is constant, discipline is what turns volatility into opportunity.
And for those building long-term wealth through KiwiSaver, staying the course remains one of the most important decisions they can make.
Generate is a New Zealand-owned KiwiSaver and Managed Fund provider managing over $9 billion on behalf of more than 190,000 New Zealanders.
This article is intended for general information only and should not be considered financial advice. The views expressed are those of the author. All investments carry risk, and past performance is not indicative of future results.
To see Generate’s Financial Advice Provider Disclosure Statement or Product Disclosure Statement, go to www.generatewealth.co.nz/advertising-disclosures/. The issuer is Generate Investment Management Limited.