Over the three-month period, the portfolio’s defensive architecture, including gold exposure and a selective approach to growth equities, initially provided meaningful downside protection relative to the broader market. However, the escalation of the Iran conflict triggered a sharp rise in oil prices and a broader liquidity-driven de-risking, resulting in simultaneous selling across both risk assets and traditional defensive positions such as gold, which weakened the portfolio’s resilience into quarter-end.
The quarter can be characterised in three distinct phases. January delivered strong early gains, supported by robust performance in gold as continued central bank demand and rising geopolitical risk premiums drove prices higher. February brought a pivot in the narrative, as the RBA surprised markets with a 25 basis point increase in the cash rate to 3.85%, citing renewed inflationary pressures associated with higher fuel costs and persistent services inflation. March was defined by a sharp escalation in the Middle East conflict, with military action involving the United States, Israel and Iran driving a surge in oil prices and triggering a global risk-off event. The RBA responded with a further 25 basis point increase to 4.10% at its March meeting, marking the second consecutive rate hike and an abrupt end to the easing cycle that had reduced the cash rate from 4.35% to 3.60% during 2025.
The domestic economy entered 2026 on fragile footing, and the events of the March quarter reinforced that fragility. Economic growth softened as elevated mortgage costs, weaker household consumption and declining business investment weighed on activity. The unemployment rate edged higher to 4.3% by March, remaining historically low but continuing to signal a gradual cooling in labour market conditions following cumulative monetary tightening.
Inflation proved stickier than anticipated. Higher oil prices resulting from the Middle East conflict flowed directly into fuel costs and began feeding through to broader goods and services prices, reinforcing concerns that inflation would remain above the RBA’s target range for longer. Government bond yields moved higher as markets repriced expectations for the terminal cash rate, while the Australian dollar traded around US$0.70 amid heightened geopolitical uncertainty and shifting interest rate expectations.
VIP enters the June 2026 quarter with a cautious and deliberate positioning, acutely aware that the macroeconomic regime has shifted from one of disinflation and policy easing to one characterised by supply-side inflation and renewed interest rate uncertainty. The portfolio’s gold allocation remains a central pillar of VIP’s defensive architecture.
On the international front, VIP retains its preference for quality, value-oriented global equity managers, including Orbis and GQG Partners, which are well positioned to navigate periods of elevated volatility. The portfolio’s USD hedge exposure is maintained given the structural uncertainty surrounding the US dollar. VIP continues to see compelling long-term opportunities in Japanese equities through its Lazard allocation, supported by ongoing corporate governance reforms and favourable currency dynamics.