While talk of peace in the Middle East has provided a window of opportunity for bond issuers – with a long list of deals coming to market over the last week – fund managers worry about what happens if the current ceasefire doesn’t hold and gives way to prolonged attrition.
Even if a deal ensues, there’s growing concern that market conditions simply won't return to business as usual overnight.
After studying the market’s tea leaves, Viktor Shvets from Macquarie Capital believes stagflation remains his base case scenario, and in light of combined slower economic growth, higher unemployment, and rising prices, doesn’t expect to see relief until 2Q FY27.
Given that policies to improve growth and unemployment tend to add to inflation and vice versa, Shvets flags stagflation as a significant lingering concern.
While Shvets expects the Iran War to boost investment diversification and benefit non-US assets, he also expects the market to return back to where it was, namely, disruptive thematic stock picking.
Buy, he also reminds the investors that the market is still in the early stages of the shock of oil filtering its way through to prices and groceries.
With the shock of oil still percolating through the system, he doubts the price of oil will be down below US$80-US$85 over the next 12 months.
“We will have a version of stagflation that’s completely baked in, so anything that’s faltering in a stagflationary environment theoretically should not perform,” said Shvets.
Market volatility and central bank constraints
Assuming Gulf’s tensions are permanently de-escalated, and investors can refocus on how to build resilient portfolios again, what will quickly emerge, notes Chris Iggo, CIO for AXA IM Core, BNP Paribas Asset Management, are the macroeconomic fallouts from events of the last eight weeks.
The more obvious fallout will centre around how central banks will respond to the changing odds of meeting their inflation targets.
The jury’s also out on whether private credit can resume its role in the provision of capital to mid-market companies, especially in the technology ecosystem.
“Markets will go down again if the ceasefire doesn’t hold. If it does, then we could quickly return to the recent highs,” said Iggo.
“Risk-off sentiment ultimately prevails until the actors say enough is enough. In the meantime, more capital is eroded by volatility and trading losses, and investor sentiment inevitably suffers more.”
Structural risks and global supply chain disruption
Meantime, Iggo notes that fixed-rate government bonds are not particularly exciting, and the stability of return paths remains threatened by inflation and fiscal concerns.
For defensive, income-focused investors with a medium-term horizon, he expects that adding credit to the starting point of a (‘risk-free’) government bond portfolio should boost expected compound returns.
“Investors can potentially use high yield to aim to improve returns from what is essentially a defensive portfolio,” he said.
“With a global high yield index yield of 7.0% and a market that has proved to be resilient, the post-conflict outlook for this asset class is encouraging.”
Meantime, while investors can’t be blamed for sitting on the sidelines while uncertainty rules, Laura Cooper, head of Macro Credit at global investment manager Nuveen, thinks markets are increasingly complacent and are not pricing in enough of the tail risks.
Cooper argues that escalating Middle East tensions and the fragility of rules-based international frameworks had been structural risks insufficiently priced by markets.
What followed, adds Cooper, confirmed that assessment, with disruption extending well beyond energy with lasting implications: the Middle East accounts for at least 20% of all seaborne fertiliser exports and the crisis is reshaping supply chains in real time across aluminium, LNG, helium, and petrochemicals.
More than 44,000 businesses across 174 economies had at least one shipment exposed as of mid-March, while the second and third-order effects are only beginning to materialise.
Three structural breaks
According to Cooper, the events of the past three months have clarified three structural breaks:
- Geopolitical risk has become structural rather than episodic: The U.S. continues to fundamentally reshape its economic and security relationships, pursuing a transactional approach and exposing fractures within traditional alliances. The Hormuz crisis is not an outlier; it is an expression of a broader shift toward boundary-testing.
- Europe was inadequately prepared for a scenario in which U.S. support becomes conditional: Europe is heading toward energy scarcity pricing at a time when its strategic autonomy and rearmament plans are still taking shape.
- The central bank playbook is constrained: The inflation impulse of the energy shock arrives simultaneously with a growth drag, a supply-side shock that conventional tools cannot address.
A closure removing close to 20% of global oil supplies is expected to lower global real GDP growth by an annualised 2.9ppts in Q2/2026.
Central banks cannot produce oil, and when faced with a stagflationary shock, the tools that address inflation worsen the growth outlook.
Investment strategy in a new geopolitical order
Given that the case for geographic diversification, scenario weighting and selectivity within asset classes is stronger today than at the start of the year, Cooper favours floating rate over fixed credit exposures.
That includes senior loans and pockets of private credit over investment-grade duration; energy and upstream assets across equities; hard assets and real return profiles.
“We remain constructive, albeit selective, on EM sovereigns where strong external balances offer both diversification and carry where traditional haven assumptions are being tested,” she said.
“An important portfolio consideration is also what markets are pricing, with complacency increasingly evident.”
While markets are normalising to the conflict, pricing a base case of partial resolution and gradual resumption of flows, Cooper reminds investors that tail risks from a prolonged closure extending into Q3, further attacks on Gulf energy infrastructure - or escalation that draws in additional regional actors - remain under-priced.
What the markets need to get their head around, argues Cooper, is that the Strait of Hormuz crisis is not an aberration from the new geopolitical order – it is an expression of it.
“Markets are transitioning from a world where geopolitical risk was something to price at the margin, to one where it shapes outcomes. Investors who understand that distinction will be better positioned for what comes next.”
Bond update
After last week’s note on how Betashares has restructured its previous hybrid focused (ASX:HBRD) ETF, Daintree have announced its global hybrid ETF (ASX: DHOF) will be revoked.
Here’s the latest on domestic corporate bond issuance:
- Air Services Australia has priced a $500 million six-year senior unsecured bond at a 5.35% fixed rate
- AMP has printed a $200 million senior unsecured one-year floating rate note at 3-month BBSW + 80 basis points
- APA Infrastructure is sounding out investors on domestic senior and subordinated bonds:
- Senior seven and a half or 10-year options
- Subordinated 30 years non-call 7.5 or 30NC10
- Bendigo and Adelaide Bank has launched a three-year senior unsecured fixed and or floating deal with price guidance of 88 basis points over swap
- Community First Bank has mandated a senior unsecured five or seven-year fixed-rate note
- Downer Group Finance has mandated a senior unsecured three-year floating rate note
- Mirvac REIT has mandated a new senior unsecured domestic green bond:
- five-year fixed and or floating-rate note
- seven-year fixed
- Nomura has priced a five-year $850 million senior unsecured fixed-rate bond at 6.17%
- Pacific Life has launched a five-year fixed and or floating funding agreement backed by a kangaroo bond with price guidance of 110 basis points over swap
- Powerco has mandated a 10-year, fixed-rate, senior secured green bond
- Scentre has launched a six-year senior fixed and or floating unsecured bond deal with price guidance of 130 basis points over swap
- Stockland has launched a seven-and-a-half-year, senior unsecured fixed-rate bond deal with price guidance of 145-150 basis points over semi-annual swap
- UBS has raised $2.75 billion in a senior unsecured multi-tranche deal:
- Three-year floating rate note priced at 3-month BBSW + 73 basis points
- Five-year floating rate note priced at 3-month BBSW + 86 basis points
- Five-year fixed rate priced at 5.518%
