Investment Commentary - May 2026

May was a constructive month for financial markets, with investors increasingly focused on the prospect of a diplomatic resolution to the Middle East conflict. Although negotiations between the US and Iran remained ongoing at month-end, signs of progress helped reduce concerns about a prolonged disruption to global energy supplies. As a result, oil prices fell sharply from the elevated levels reached during the height of the crisis, easing fears of a sustained stagflationary shock and supporting risk assets.

Equity markets responded positively to the improving backdrop. Developed market equities advanced +4.6% during the month, while emerging markets outperformed with gains of +9.7%. Growth stocks continued to lead the market higher, returning +7.0% compared with +2.3% for value stocks, as enthusiasm surrounding artificial intelligence and semiconductor demand re-emerged.

Equity markets delivered another strong month of gains, supported by robust corporate earnings, resilient economic data and renewed investor enthusiasm for technology and AI-related companies. In the United States, the S&P 500 rose +5.3%, reaching fresh record highs, while the technology-heavy Nasdaq gained more than +15% during the month. Technology was once again the best-performing sector, advancing +15.6%, as investors rewarded companies exposed to semiconductor demand and AI infrastructure spending. Earnings season provided additional support, with US corporate profits rising approximately 30% year-on-year and growth extending well beyond the technology sector.

Emerging markets were among the strongest performers. The MSCI Emerging Markets Index returned +9.7%, driven largely by Asia. South Korea delivered exceptional gains of around +33%, while Taiwan rose approximately +14%, reflecting their central role in the global semiconductor supply chain.

Elsewhere, Japanese equities continued their impressive run. Strong economic data, including first-quarter GDP growth of +2.1% and robust export activity, helped support a gain of +6.2% for Japanese equities. European markets also moved higher, with the STOXX 600 advancing +3.2%. UK equities lagged in this tech-lead environment, with the FTSE 100 posting a modest +0.7% gain over the period.

Bond markets experienced considerable volatility throughout May as investors attempted to balance persistent inflation pressures against improving geopolitical developments. Early in the month, stronger-than-expected inflation data and concerns that energy prices could remain elevated for longer pushed yields sharply higher. Government bond yields reached levels not seen for many years, with Japan's 10-year yield rising to its highest level since 1997, Germany's 10-year Bund yield reaching its highest level since 2011, and UK gilt yields briefly touching their highest levels since 2008.

However, sentiment improved significantly towards month-end as hopes for a ceasefire extension and eventual reopening of the Strait of Hormuz gathered momentum. Falling oil prices reduced inflation concerns and encouraged investors back into government bonds. UK Gilts were among the strongest performers, returning +2.0% during the month as yields fell sharply from their mid-May highs. Eurozone sovereign bonds gained +1.1%, while US Treasuries posted a more modest gain of +0.1%.

Inflation remained an important consideration for policymakers. US consumer prices continued to rise at a relatively strong pace, while euro area inflation accelerated due primarily to higher energy costs. Nevertheless, investors increasingly focused on the possibility that easing geopolitical tensions could eventually reduce inflationary pressures. Against this backdrop, central banks maintained a cautious stance, with markets continuing to reassess the timing of future policy moves.

Credit markets also performed well. Corporate fundamentals remained supportive, helping spreads tighten as investors became more comfortable taking risk. Euro high-yield bonds generated returns of +1.0%, while emerging market debt returned +0.8%. Overall, the Bloomberg Global Aggregate Bond Index gained +0.3% despite considerable intra-month volatility.

Commodity markets were among the most heavily influenced by developments in the Middle East. Brent crude oil fell -19.3% during May, representing its largest monthly decline since the early stages of the pandemic in 2020. The sharp fall reflected growing optimism that a diplomatic agreement between the US and Iran could ultimately restore stability to energy markets and ease concerns about supply disruptions. Despite the decline, oil prices remained elevated relative to pre-conflict levels.

Precious metals also weakened. Gold declined -1.7%, extending its recent pullback as real yields moved higher and investors became less concerned about the inflationary implications of the conflict. Silver also posted modest losses. Industrial commodities were more resilient, with copper advancing strongly amid continued optimism surrounding global AI infrastructure spending and data centre investment. Agricultural commodities also remained firm, supported by ongoing supply concerns and elevated food inflation.

Currency markets were relatively subdued compared with equities and bonds. The US dollar index rose modestly by around +0.3%, although most major currencies traded within relatively narrow ranges. Emerging market currencies strengthened overall as risk appetite improved, and investors moved back into higher-growth regions.