Sustainable Opportunities Funds: Markets and rates: what’s driving returns now

The strong equity market performance came despite the ongoing Middle East conflict. While a lasting peace agreement remains elusive, the fragile ceasefire agreed on 8 April has largely held. Commentary from both the US and Iran became more constructive towards month end, with progress reported on several key issues. These include the potential reopening of the Strait of Hormuz by Iran, which would allow an estimated 13m barrels of oil per day to return to the global market.

Until the conflict is resolved and the strait reopened, oil prices can be expected to remain higher for longer. Because of this markets are now expecting central banks around the world to raise interest rates to contain inflation. In the UK, two 0.25% rises are anticipated by year end, taking rates to 4.25%. In the US, expectations have shifted from two rate cuts to a 0.25% increase in 2026. In Europe, two 0.25% increases are expected in 2026, taking Eurozone rates to 2.5%.

Against this backdrop, government bond yields rose through most of May, before easing towards month end as renewed peace efforts in the Middle East supported sentiment. A potential US / Iran agreement and the reopening of the Strait of Hormuz would improve the geopolitical backdrop and help contain the energy shock, thereby limiting its inflationary impact. Under this scenario, bonds could benefit further as inflation expectations moderate.

Equity markets meanwhile continue to be driven by earnings and capital expenditure from the so-called AI hyperscalers. On this last point, Pope Leo XIV surprised investors by using his first encyclical to offer a timely critique of AI, focusing on the need to safeguard human dignity during rapid technological change. He argues that AI should be “disarmed” from dynamics of domination and redirected towards the common good, highlighting risks relating to inequality, employment and the concentration of power in large technology platforms. While light on practical solutions, his core message is clear:  AI is a powerful tool that requires strong governance and oversight. It is a welcome shift in focus towards the social and governance dimensions of innovation, ensuring technology serves society rather than controls it.

Past performance is not a reliable indicator of future performance.