Finding value in global credit markets

Following our conversation earlier this year, we catch up with portfolio managers Matthew Jackson (MJ) and Michael Booth (MB) to take the temperature of credit markets and the portfolio after a busy period shaped by the war in Iran and rapid growth in AI-related investment and issuance. What has changed? And where are they finding value now?

When we last spoke, the conflict in the Middle East had just begun. What has changed since then?

MJ: “Much less than you might expect! Spreads initially widened but are now within one or two basis points of where they began the year. Neither the conflict nor concerns around private credit and AI disruption have turned into a broader credit market event.”

MB: “Investors still expect the economic effects of the conflict to be relatively contained and transitory, and there is a persistent belief that policymakers will step in if markets become disorderly. More importantly for credit, higher energy prices and inflation concerns have pushed government bond yields higher. That has lifted all-in credit yields and attracted demand, helping spreads remain remarkably stable.”

Has that resilience changed how you are positioning the portfolio?

MB: “At the margin, yes. European investment grade spreads have held in extremely well and are now slightly tighter than their US equivalents at index level. Yet we still see greater fundamental vulnerability in Europe, particularly among cyclical and energy-sensitive issuers. European gas prices reached their highest level since the conflict began, although they remain below the 2022 peaks.”

MJ: “At the portfolio level, that has led us to rotate some risk from more exposed European sectors into US issuers. This is different from last year, when Europe still offered a clear valuation discount after its sharp underperformance in 2022. Much of that convergence has now played out.”

AI-related investment has brought a wave of new bond supply. What does that mean for credit investors?

MB: “This is the big credit story of the year. At the start of 2026, the expected supply from the hyperscalers looked manageable. Since then, capital-expenditure forecasts have kept rising, new issuers have entered the market and some cash-rich technology companies have issued far more debt than investors anticipated.”

“With capital expenditure increasingly outpacing operating cash flow, bond markets are likely to finance much of the shortfall. A substantial volume of paper will need to be absorbed over the next 18 months to two years. We have already seen signs that the US market is becoming more wary, so issuers may increasingly turn to shorter maturities and/or non-dollar markets.”

How are you approaching that supply in the portfolio?

MJ: “Tactically. The repricing has so far stayed within technology rather than pulling the whole market wider, and some recent deals have struggled after issuance. We don’t think this is a market in which you simply stay structurally long these issuers. New deals can offer attractive concessions, but when spreads rally, we are prepared to reduce exposure and wait for the next opportunity. In percentage terms, we remain somewhat underweight the sector, although our spread-risk exposure is closer to neutral because we hold selected longer-dated bonds where curves are particularly steep.”

Why is this becoming a more supportive environment for active management?

MJ: “The past two years have been less fertile for active credit investors, with tight spreads, low volatility and relatively little differentiation between sectors and ratings. We now see genuine reasons for that to change. Heavy technology issuance is creating greater dispersion, while new data-center structures require much more detailed analysis.”

“There is also an important index-concentration effect. Passive investors will therefore automatically allocate more to companies as they increase debt, regardless of whether that debt offers attractive value. Active managers can be more selective by assessing each structure and new-issue concession and reducing exposure after a rally, while avoiding issuers where the risk is not adequately priced.”

Data-center financing is one area where that selectivity seems particularly important. What makes these deals different?

MB: “Data-center joint ventures have effectively created a new segment of the credit market, and the analysis is closer to project finance than conventional corporate credit. You are often lending to a special-purpose vehicle backed by a physical asset and a lease, so the focus shifts to debt-service coverage, amortization, lease terms, covenants and the protections available if a tenant exits early. The structures and performance of these deals have varied considerably. That dispersion is important: it rewards detailed structural analysis rather than a broad sector allocation.”

What political and sovereign risks should global credit investors be watching?

MJ: “France stands out as a country to watch. The market has begun to price more sovereign risk, and French bank spreads have started to lag, although the move in credit remains modest. High debt and persistent deficits are not necessarily destabilizing on their own; they usually need a political or policy trigger. France has both weak fiscal fundamentals and the potential for that trigger as the budget and elections approach.”

Where do you currently see the strongest sector opportunities?

MJ: “Banks remain attractive because fundamentals are solid and valuations still compare favorably with non-financials. But the opportunity has moved. Subordinated bank debt has become expensive, so we have shifted higher in the capital structure toward senior paper and focused more on large, systemically important banks.”

MB: “We have taken profit in energy and basic industries, reduced some European real estate and auto exposure, and added to more defensive areas. Technology will remain the main sector story. We have exposure, but we are managing it actively and do not expect a sustained rally until capital-expenditure guidance stabilizes and investors can see an inflection point in supply and greater clarity on returns on investment.”

Finally, how is AI changing your own investment processes?

MB: “AI can extract the basic facts and data from unfamiliar issuers much faster, helping analysts cover more names and reducing bottlenecks around new-issuer analysis. It has been particularly useful in complex data-center transactions, where the documentation can be extensive.”

MJ: “Most investors can access similar technology and data; the difference lies in how the output is interpreted, challenged and combined with analyst experience. Our analysts still own the credit view, engage with management teams and rating agencies, and work closely with the portfolio managers to reach an investment decision. AI gives a large global research team even greater speed and breadth, while seasoned analysts provide the context, judgment and accountability that technology alone cannot.”