May Newsletter

Middle East ceasefire and the market response

Overnight, global markets were buoyed by news of a proposed peace agreement between the United States and Iran. The reported terms include a ceasefire extension, the reopening of the Strait of Hormuz, the lifting of the US naval blockade, a halt to military action across multiple fronts including Lebanon, and a 60-day negotiation window to address Iran’s nuclear program, including uranium enrichment and stockpile management. There are also reports that the draft agreement includes sanctions relief, an oil-sanctions waiver and the release of frozen Iranian assets, although the final text has not yet been published at the time of writing and important details remain unclear.

Given the importance of the Strait of Hormuz to global oil supply, markets immediately treated the announcement as a material reduction in geopolitical risk. Oil prices fell, and equity markets are up strongly on the news. Lower oil prices are generally positive for inflation expectations, household cost pressures and corporate margins, particularly for energy-importing economies. The Australian share market responded strongly, with the ASX rallying as investors moved back into risk assets. Banks and major resource companies were among the beneficiaries, with the improvement in sentiment reflecting both lower energy risk and a broader relief that the conflict may not escalate further.

That said, investors should be careful not to confuse a ceasefire announcement with a permanent resolution. The Middle East remains highly complex, and regional tensions have not disappeared simply because hostilities have paused. History shows that ceasefires in the region can be fragile, with implementation often proving more difficult than negotiation. The durability of any agreement will depend not only on compliance by Iran and the US, but also on the actions of aligned groups and regional actors whose interests may not be fully aligned with the terms of the deal.

Even if military activity subsides, sanctions frameworks, shipping routes, insurance costs and energy infrastructure may take time to normalise. Any disruption to these areas could continue to affect global supply chains and commodity markets long after the ceasefire announcement. As a result, while the agreement may represent a meaningful step forward and reduce the immediate risk of escalation, investors should remain mindful that geopolitical risk rarely disappears overnight and that periods of renewed volatility remain possible.

We are also mindful that the market’s initial reaction to geopolitical peace can be misleading. After the 1973 Middle East conflict and oil shock, markets did not immediately return to normal once the fighting stopped. Energy markets remained disrupted, inflation pressures persisted and equity markets suffered heavily through 1974, the worst of which occurred after the conflict had ended. The lesson is that peace announcements and physical market normalisation are not the same thing. Oil needs to flow again, ships need time to move product, inventories need to be rebuilt, and pricing behaviour needs to stabilise. The inflationary impacts may linger for much longer than the duration of the physical conflict.

It is worth noting that the Federal Government has already halved the fuel excise from 44.2 cents per litre to 22.1 cents per litre as a temporary cost-of-living measure, with the relief currently scheduled to expire on 30th June, after which the full excise rate is due to be reinstated. If fuel prices remain elevated, it will be interesting to see whether the Government — already under pressure following the Federal Budget announcement — chooses to extend the relief. Doing so would provide near-term support for households and businesses by lowering transport and freight costs, but it would also come at a fiscal cost at a time of deteriorating budget finances.

From an investment perspective, the market response is understandable. Reduced geopolitical risk lowers the probability of a prolonged oil supply shock and reduces near-term inflation concerns. It is extremely positive and welcomed news. However, we would view the rally as a relief rally rather than a reason to materially change long-term portfolio positioning. It remains to be seen whether peace holds long enough to reduce energy volatility and prices, lowers inflation risk and improve business confidence. Hopefully it does!

A follow-up on the Federal Budget – Housing affordability, tax policy and the limits of simple explanations

The Federal Budget’s proposed changes to negative gearing and capital gains tax are being presented as a key measure to improve housing affordability by reducing the tax advantages available to property investors. The policy argument is that existing tax settings have helped make residential property an attractive investment vehicle, thereby increasing competition between investors and home buyers. While there is no doubt that tax settings influence investor behaviour, the argument that CGT and negative gearing concessions are a central reason for rising house prices is too simplistic. In our view, two factors that have a far greater influence on house prices are population growth and access to credit for property purchases.

Western Australia provides a useful counterexample. From June 2014 to June 2019, WA’s mean dwelling price fell from approximately $592,300 to $500,400, a decline of around 15.5%. This occurred while the same Federal negative gearing and CGT settings remained in place. One reason for falling property prices was soft population growth. Over the same period, WA’s population growth was subdued, averaging only around 1.1% per annum, well below the growth rates experienced during the earlier mining-boom years and below the eastern states during the same period. In other words, under the same national tax settings, WA property prices fell materially, with weak population growth a significant factor.

The subsequent housing recovery tells the other side of the story. COVID-era border controls changed WA’s population and labour-market dynamics. The practical reality for many workers was that if they were earning income in WA, particularly in mining and related industries, they needed to live in WA. That helped reverse earlier population weakness. From June 2020 to June 2025, WA’s population increased from approximately 2.713 million to 3.044 million, an increase of around 331,000 people, or 12.2%. This equated to more than double the average annual population increase recorded during the 2014–2019 period. Understandably, demand for housing rose markedly. 

Turning to credit, Federal housing policy has also been highly supportive of the housing market since 2020. The Government’s 5% deposit scheme, which commenced in January 2020, enabled eligible buyers to enter the market with deposits as low as 5%. The newer Help to Buy scheme, introduced in December 2025, goes further by providing a Federal Government equity contribution of up to 40% for new homes. These policies have materially increased first-time homeowners purchasing capacity and enabled many additional first-home buyers to access the property market at a time when housing supply remains constrained.

The unsurprising result has been upward pressure on property prices, particularly at the lower end of the market. Between June 2020 and June 2025, WA’s mean dwelling price increased from approximately $499,100 to $914,500, an increase of more than 80% over the 5-year period.

This is why we believe the Budget’s focus on negative gearing and CGT is too narrow. Tax concessions can influence investor behaviour, but they are not the primary explanation for house price movements. The more important drivers are the number of people needing housing — which partly explains why migration policy has become such a hot political issue — and the amount of credit and capital available to purchase that housing. If population growth slows, or government policy changes, or banks reduce borrowing capacity by no longer recognising tax deductibility in investment-loan serviceability assessments, the impact on property markets could be significant, particularly given the already elevated levels of housing unaffordability. There is every chance the Federal Government’s prediction — that property prices will continue to appreciate, just at a slower rate — may prove to be a bold one.

This also has important implications for investment markets. Australia’s major banks remain heavily exposed to residential housing credit, with mortgage lending forming a very large share of their balance sheets. If population growth slows, investor borrowing capacity is reduced, or house price growth moderates more sharply than expected, this may create a meaningful headwind for the banking sector. Slower housing credit growth would reduce one of the major engines of bank earnings growth, while softer property prices could also affect loan-to-value ratios, borrower confidence and credit risk. We are not suggesting an imminent banking crisis, but we do believe the sector is more exposed to housing policy, migration policy and credit conditions than is often appreciated. For investors, this reinforces the importance of not viewing the banks simply as defensive dividend-paying stocks, but as being leveraged to the Australian residential property cycle. Given current elevated bank valuations, this is an area of investment we remain extremely cautious on. 

Takeover Action in Steadfast

As noted in past letters, we have recommended Steadfast Group as a core portfolio inclusion, and it is now widely held across client portfolios. 

Steadfast has received a non-binding and conditional takeover proposal from a consortium comprising Amwins Group and Dragoneer Investment Group at $6.00 per share in cash. The offer represents a premium of approximately 52% to Steadfast’s last closing price prior to the announcement. Steadfast has entered into an exclusivity and process deed with the consortium, and the proposal remains subject to due diligence, regulatory approvals and other conditions.

At this stage, we believe investors should take no action. While the proposed $6.00 per share offer is clearly a significant premium to where Steadfast was trading before the announcement, we do not view it as particularly generous in the context of where the shares have traded historically and the quality of the business. Steadfast is a high-quality insurance distribution platform with a strong broker network and has demonstrated strong earnings per share growth since listing in 2013. We are therefore somewhat surprised that the directors intend to recommend the offer if agreement is reached, in the absence of a superior proposal and subject to an independent expert concluding that the offer is in the best interests of shareholders.

We are also perplexed that the shares are trading around $5.20, which is a material discount to the proposed $6.00 cash offer. This discount suggests the market is assigning a meaningful probability that the transaction will not proceed. That may reflect concerns that due diligence could uncover unexpected issues, that final binding terms may not be agreed, that regulatory approvals may not be granted, or that shareholders may ultimately reject the proposal. 

We would be surprised if any of these risks ultimately prevent the transaction proceeding. There is also the possibility that another party emerges with a competing bid for the company. For now, the appropriate course is to wait for further details, including the outcome of the due diligence process, the release of any scheme documentation and the board’s formal recommendation.

New Member of the Horizon Team

We are pleased to introduce Paul Du Plessis, who has recently joined the Horizon team.