The first quarter of 2026 has delivered a masterclass in why set-and-forget investing no longer works. Geopolitical conflict, commodity shocks, and a structural shift in how markets price risk have created an environment where the difference between active management and passive hope has never been wider.
At Merit, we don't react to headlines. We position ahead of them. Here's what our latest investment committee review tells us about where markets are heading, and what we're doing about it.
The World Has Changed. Your Portfolio Should Too.
If you still think geopolitics is background noise, consider this: the Global Geopolitical Uncertainty Index is approaching levels we haven't seen since COVID. Except this time, it's not a single event with a clear recovery path. It's a rolling series of disruptions that compound on each other.
We use the term "permacrisis" deliberately. The era of smooth, predictable markets that rewarded passive index investing is over. In its place: Iran conflict escalation, US fiscal strain, USD weakness, bond yield volatility crushing tech valuations, and private credit markets showing cracks.
The good news? Earnings growth remains strong across all major regions. Australian companies are forecast to deliver 14% earnings growth in 2026. The opportunity is real. But capturing it requires precision, not a broad market ETF that owns everything including the losers.
Iran: The Geopolitical Flashpoint
The US-led strikes on Iran have dramatically reshaped the Middle East security landscape. The strategic objectives are now clear: eliminate enrichment capability, neutralise missile and proxy networks, and contain naval threats. Iran has been effectively defanged as a conventional military power.
For Australian investors, the key transmission mechanism is energy. Australia sources approximately 95% of its fuel from Singapore, with a three-month supply chain. Every major oil disruption in the last 50 years has followed the same pattern: initial spike, market fear, then recovery within one to three months as supply adjusts.
Our Position: We took energy profits earlier in the quarter (including positions in Woodside and the FUEL ETF) and rotated proceeds into beaten-up quality names. History tells us the market overreacts to geopolitical energy shocks, then normalises. We've positioned to benefit from that normalisation.
Gold: The Silver Spike Exit Signal
Gold has been the standout performer of the last 12 months. Gold stocks have delivered returns exceeding 100%. For our clients with exposure, the returns have been exceptional.
But here's what most advisers won't tell you: every major gold bull market in the last 50 years has ended the same way. Silver surges violently, typically 300-400%, then collapses. It happened again this quarter. Silver spiked over 400% and then fell 30% in a single session.
Signal Triggered: Our proprietary silver-to-gold momentum indicator has triggered an exit signal. Historically, gold equities have fallen 40% or more from peaks when this signal fires. We have exited all gold positions across client portfolios and locked in the gains.
This is the difference between active management and passive exposure. An index fund holds gold stocks at the peak and rides them down 40%. An actively managed portfolio takes the profit and redeploys it.
Private Credit: Cracks Appearing
Private credit has been the darling of the alternative investment world. But cracks are appearing. Blue Owl Capital, one of the sector's largest players, has fallen sharply. The concern is straightforward: many private credit borrowers are software and AI companies with high revenue growth but questionable cash generation. As interest rates stay elevated, refinancing risk is real.
Our Approach: We are selective in private credit exposure. Where we have allocation, it's through high-quality vehicles like Pengana Private Credit, which is delivering 8-9% yield with conservative underwriting. We avoid the "private credit as a magic bullet" narrative that's become popular in recent years.
The USD Weakness Trade
The US dollar is weakening structurally. US government debt levels are unsustainable at current trajectories, and global capital is gradually diversifying away from USD-denominated assets. For Australian investors, this creates both risk and opportunity.
Risk: unhedged international equity positions benefit from a weak AUD but suffer when the USD falls. Opportunity: Australian dollar-denominated assets, including domestic equities and property, become relatively more attractive to global capital.
Our portfolios are positioned with appropriate currency hedging on international allocations and a deliberate tilt toward quality Australian equities that generate domestic revenue.
US Debt: The $50 Trillion Elephant in the Room
Here's the number that should be on every investor's radar: US federal debt has crossed $40 trillion. At current trajectories, it will hit $50 trillion within three years. That's not a forecast from the fringe. It's basic arithmetic applied to existing spending commitments, interest costs, and revenue projections.
At some point, the market will stop treating US Treasuries as risk-free. When fear of a US default becomes a serious pricing factor, the US dollar doesn't just weaken. It crashes. And when the world's reserve currency is in genuine distress, the flight to hard assets is violent and fast.
This is precisely why our gold exit is tactical, not permanent. We've taken profits on the current gold cycle because the silver spike indicator tells us a near-term pullback is likely. But the structural case for gold has never been stronger. A $50 trillion debt load with no credible path to reduction is the ultimate gold bull case.
Our Forward Plan: When the gold pullback plays out and prices stabilise at lower levels, we will steer portfolios back toward heavy gold and precious metals allocation as a structural hedge against USD collapse risk. This is not a set-and-forget trade. It's a cycle: take profits at the peak, redeploy at the trough, and repeat. Active management is the only way to capture this.
The investors who will be caught out are those sitting in passive international equity ETFs with full USD exposure and no hedging strategy. When the dollar moves, it moves fast, and there's no rebalancing committee at an index fund making the call to protect you.
Bond Yields: The Silent Portfolio Killer
Rising bond yields continue to pressure growth stocks, particularly in the technology sector. Some tech darlings are down over 30% from their peaks. The maths is simple: when the discount rate rises, the present value of future earnings falls. Companies priced for perfection have no margin for error.
This is why our portfolios maintain a diversified approach across asset classes, including direct fixed interest holdings through our Morgans partnership, which gives our clients access to Australia's largest floating rate note distribution network. Floating rate notes pay more as rates rise, providing a natural hedge against the very environment that's punishing long-duration assets.
What This Means for Your Portfolio
The theme across every one of these developments is the same: passive investing rewards you in calm, predictable markets. We don't live in that world anymore.
The Merit Advantage: Our partnership with Morgans gives every Merit client access to a team of 30+ research analysts, daily portfolio oversight, quarterly investment committee reviews, and the economic insights of Michael Knox (rated in the Top 10 Australian economists). Your portfolio isn't sitting in an index fund hoping the market goes up. It's being actively managed, actively protected, and actively positioned for what comes next.
This quarter, that active approach meant:
- Taking energy profits before the post-conflict normalisation
- Exiting gold at or near peak valuations on a proven historical signal
- Rotating into quality names trading at discounts due to short-term market fear
- Maintaining defensive positioning through floating rate notes and selective private credit
- Avoiding the tech trap that has caught passive index investors
The cost of not having an active strategy isn't visible on a statement. It shows up as the opportunity you missed, the loss you didn't avoid, and the compounding damage of staying in positions that have passed their peak.
Want to Know How Your Portfolio Is Positioned?
If you're unsure whether your current investments are built for this environment, let's talk. A 30-minute review could be the most valuable conversation you have this year.
Book a ConsultationDisclaimer: This article provides general information only and does not constitute personal financial advice. The views expressed are based on market conditions as at March 2026 and may change without notice. Past performance is not a reliable indicator of future performance. Any investment involves risk, including the possible loss of capital. Before making any financial decisions, consider your own circumstances and seek professional advice. Merit Financial Services Pty Ltd (ABN 89 125 557 002) is a Corporate Authorised Representative of Paragem Pty Ltd (ABN 16 108 571 875, AFSL 297276).