While private credit is largely insulated from the Middle East conflict, rising oil prices and interest rate pressure could still potentially rattle the market, according to industry insiders.
Over the weekend, the US and Israel launched strikes on Iran in a major escalation of military action, with the conflict rapidly spreading across the Gulf and prompting attacks and retaliation involving countries including the UAE, Qatar, Bahrain and Kuwait.
Financial markets began reacting to the risk of further escalation of the conflict this morning. US stocks opened lower, with the Dow Jones down around one per cent, following falls in Asia and Europe, while the FTSE 100 was down 1.6 per cent by the time US markets opened.
There has also been a rally in oil, with Brent crude up roughly 10 per cent to around $80 (£59.7) a barrel, and European gas prices spiking nearly 50 per cent after Iran targeted Qatar’s liquefied natural gas facilities.
For private credit, the Middle East conflict is expected to have limited direct impact, given funds’ minimal exposure to commodities companies or shipping entities. However, there are several indirect channels investors should watch, including energy markets and inflation risks.
Any disruption to oil shipping routes, particularly through the Strait of Hormuz, could lift energy prices, feeding into global inflation and altering rate expectations. Overall, reports suggest Brent crude could exceed $100 a barrel in a worst-case scenario if shipping disruptions and damage to infrastructure continue.
“At a broader level, the conflict is driving up commodities prices which will feed into higher inflation and therefore make it harder for central banks to cut interest rates,” Solomon Nevins, partner at The Fund Review, told Alternative Credit Investor. “The result should be that the interest income, which is linked to base rates, runs at higher levels than previously anticipated.”
Overall, this inflation-driven pressure on interest rates could increase debt servicing burdens for more leveraged companies.
Read more: UK investors turn to asset-based finance amid geopolitical tensions
Daniel Casali, chief investment strategist at UK wealth manager Evelyn Partners, also told Alternative Credit Investor that market sentiment and liquidity are factors private credit investors should consider.
“Heightened geopolitical uncertainty can encourage investors to move toward safer assets, pushing credit spreads wider and temporarily dampening demand for private credit allocations,” Casali said.
Gold is up around 2.5 per cent this morning, reflecting demand for traditional safe havens. Some reports also suggest the Middle East conflict is making investors more nervous about credit markets, which are already under strain due to concerns about artificial intelligence affecting software companies.
Regional exposure is another consideration, Casali said, for managers with investments in the Gulf, the broader instability, particularly following recent attacks on regional infrastructure, may pose additional operational or economic risks.
“Overall, if the conflict remains contained and major energy flows are not significantly impeded, the broader impact on private credit should stay modest, consistent with the historically short-lived market effects of similar geopolitical shocks,” Casali added.
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