Fund Return 2026-2027

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Investment Commentary

Provided by Mercer - CERS Investment Adviser

Market Developments

Global equities rallied in May: the ACWI returned 5.2%. US equities outperformed developed non-US equities. Emerging markets outperformed both the U.S. and other non-US developed markets, led by strong technology-driven gains in Asia—particularly South Korea, which is up more than 100% year-to-date. The dollar strengthened against major developed currencies after April weakness, and the yield curve steepened as medium- and long-term yields rose. U.S. fixed income returns were moderately positive as rising Treasury yields were more than offset by high coupons and tightening credit spreads.

The Senate confirmed Kevin Warsh as Federal Reserve Chair. Outgoing Chair Jerome Powell will continue as a Fed governor with a voting seat. Warsh is expected to favor rate cuts, though rising inflationary pressures and board opposition could complicate his agenda. The FOMC’s April minutes sounded hawkish: several members wanted to remove the Fed’s easing bias from forward guidance amid persistent inflation uncertainty.

Headline U.S. inflation rose to 3.8% year-over-year in April, largely driven by energy; core CPI increased to 2.8%. Headline inflation eased in April in the U.K. and Japan but rose in the Euro Area and Australia, with Australia’s rate reaching 4.6%. In May, few major central banks had rate-setting meetings; the Reserve Bank of Australia raised rates 25 bps to 4.35% in response to high inflation.

The Middle East conflict remained in the headlines in May. The U.S. continued its naval operation to block Iran’s energy exports via the Strait of Hormuz, aiming to pressure Iran’s regime into making a deal that would end its nuclear weapons program. Despite these tensions, Brent crude fell below $100 per barrel and equities rose, reflecting expectations that disruptions will be temporary. President Trump visited China during the month to discuss trade and geopolitical issues.

Listed real assets—global REITs and listed infrastructure had negative performance in May as yields continued to rise. Commodities posted negative returns as oil prices declined meaningfully; gold also fell slightly. Year-to-date, broad commodities, natural resources and energy have outperformed broad global equities by a considerable margin while gold has outperformed broad fixed income indices.

Outlook

The recent jump in energy prices delivers a stagflationary shock to the global economy, with the magnitude depending on how high energy prices rise and for how long. Assuming energy prices follow futures market pricing, the overall blow to economic growth should be manageable and inflation should fall back after a near-term surge. However, a prolonged period of much higher oil prices could have a more significant effect, especially if financial markets weaken sharply. Prior to the energy shock, we saw a 'goldilocks' scenario, underpinned by easing inflationary pressures that supported an accommodative monetary policy and relatively benign financial conditions. Whilst the Iran conflict has challenged this narrative, some key fundamental drivers still appear solid. For example, the ongoing AI boom and the related pickup in productivity growth as well as expansionary fiscal policy are likely to continue to be supportive of growth. Geopolitical tensions and policy uncertainties constitute significant risks at this juncture, particularly given their potential to induce nonlinear effects on liquidity and financing conditions.

May 2026 Market Commentary

Notes