Mercer Investment Insights Q2 2026

Welcome to this edition of Investment Insights. Today we have Mercer New Zealand's Chief Investment Officer, Del Hart with us. Hi Del. Kia ora Tatiana, it's great to be here. Conflict in the Middle East has dominated headlines and the oil price remains high. How has this been impacting investors? When geopolitical events like this happen, markets often react quickly because it creates uncertainty, especially when this involves key energy supplies and shipping routes. This quarter, the conflict raised worries about oil shipments through the Strait of Hormuz, a crucial route for about 20% of the world's sea-transported oil. What did that mean for investors? Unfortunately, it meant a quarter of negative returns for those invested in growth-oriented options, as well as for those in conservative options, since the disruption impacted both growth and defensive asset classes. Growth investments like shares dropped as investors became more cautious about the risks and slower growth. Interestingly, within shares, the energy sector performed very well, rising about 38%, helped by the jump in oil prices. On the other hand, sectors that rely on consumer spending, like retail and leisure, fell by about 10% as people worried that higher fuel prices might reduce their spending. Commodity prices rose sharply, led by energy, with oil prices nearly doubling to around US$118 per barrel. This environment was also challenging for usually defensive bond markets, which felt pressure because higher oil prices can push inflation up, which is unfavourable for bonds. New Zealand government bond yields rose, causing a small negative return. Global credit markets also became more cautious. Overall, it was a volatile quarter, with weaker share markets and a renewed focus on inflation and interest rates. Thanks, Del. How do higher energy prices contribute to inflation, and what does that mean for investment markets? Sure. Higher energy prices can lift inflation in two ways. First, directly. When petrol and household energy costs rise, that can show up quickly in inflation measures. Second, indirectly. Companies face higher energy costs for transporting and producing most goods and services, which can lead to higher prices across the board. Why does that matter for markets? Because inflation affects interest rates, and interest rates affect the pricing of most investments. If inflation sticks around, this puts pressure on the Reserve Bank of New Zealand. and other central banks to increase rates. A sustained energy shock can push up inflation expectations and keep rate expectations higher, which can be a headwind for both shares and bonds. What should investors be mindful of in the coming months? There are three things I'd highlight. Geopolitics and oil prices will continue to be important and can cause quick market moves, both to the downside but also upside when there is a resolution. Secondly, inflation prints and central bank messaging matters. The key question is whether higher energy costs are a short-term spike, or whether they feed into broader inflation. That will heavily influence interest rate expectations. And finally, ensure your investment option aligns with your risk profile and stay focused on diversification and time horizon. This quarter showed how different parts of the market can behave very differently. Energy was strong, while other sectors were weaker. Our portfolios are diversified and designed to help manage this kind of uncertainty. To sum up, the Middle East conflict has pushed oil prices higher, increased markets' ups and downs, and brought inflation and interest rates back into focus. While markets may remain unsettled for now, staying disciplined and diversified remains important for long-term investors. Thanks Del, and thank you for watching this edition of Investment Insights.