A narrow waterway in the Persian Gulf has gripped the attention of the entire world following the attack on Iran by Israel and the US. Maritime traffic through the Strait of Hormuz has almost come to a halt as Iran fires missiles and drones on ships trying to pass the waters that carry 20% of global oil exports.
The focus is now on oil and gas prices and what that means for the global inflation outlook and growth, as dangers grow for regional energy assets such as natural gas fields and oil refineries. Risk markets have stayed relatively calm even as crude and gas prices have surged since the conflict began. High yield credit spreads have widened from near historical tights as investors weigh the effect on the broader economy.
Most people draw a parallel to the oil crisis of the 1970s when trying to understand the current situation. The energy shock of the 1970s happened due to a confluence of factors including the Arab blockade of oil flows during the Yom Kippur war between Israel and some of its neighbours, the collapse of the Bretton Woods system and the Iranian revolution. While the sudden rise in oil prices is a cause for concern, prices would need to remain high for a prolonged period to significantly raise long-term inflationary expectations and severely hurt global growth.
Tight spreads
At this point in time, our base case is still that normalcy will return in a matter of weeks, resetting oil prices at lower levels. Much of the Middle East is embroiled in the war as Iran has responded by attacking energy infrastructure in Saudi Arabia, Qatar, Bahrain, Kuwait, Iraq and the UAE. Prolonging the war is in no one’s interest and we believe that the Strait of Hormuz will reopen.
Although the start of the conflict with Iran wasn’t wholly unexpected, the spread of the conflict to the whole of the Middle East has surprised many. Ahead of the event, credit spreads were at the tight end of historical ranges, reflecting investors’ optimism about economic growth, dovish central banks and fiscal stimulus. Indeed, valuation had remained quite expensive throughout 2025 and carried over to the new year.
The Iran situation is a new negative risk, but over the past six to 12 months, our focus was already on the weakening US labour market and waning consumer confidence as we looked for signals to understand the strength of the broader economy. In particular, the unemployment rate has been ticking up. The weakness in private credit and concerns about software companies due to issues stemming from AI were also underlying structural risks to watch. Therefore, we weren’t convinced the narrow difference in yields between the credit market and risk-free rates was entirely justified. It’s important to remember that credit spreads have always mean-reverted – expensive valuation should be a warning sign to investors as it normally highlights market complacency about the future and potential economic risks.
High yield bonds: equity like returns with less volatility
| MSCI World Net Total Return Index, EUR HDG | Global Aggregate Treasuries, EUR Hedged | Global Aggregate Corporate, | ICE BofA Global High Yield Constrained Index, EUR Hedged | MSCI Europe Net Total Return EUR Index |
|---|---|---|---|---|---|
Total return p.a. | 7.1% | 2.6% | 3.4% | 6.1% | 5.7% |
Volatility | 14.0% | 3.3% | 5.1% | 8.9% | 14.5% |
Sharpe ratio | 0.42 | 0.40 | 0.42 | 0.54 | 0.31 |
Understanding company fundamentals is always important, particularly when broader valuations are less compelling. In recent weeks, cyclical high yield credits in sectors negatively exposed to higher energy prices have been weakening quite aggressively, including airlines, consumer discretionary, chemicals and some of the industrials. This is a theme to keep an eye on, as it may present an attractive entry point for patient investors. Those cyclical sectors could also be highlighting weaknesses in the economy about which risk markets may still be too complacent.
Although credit spreads have widened since the conflict began, the price action has still not been particularly dramatic. This reflects an investor consensus that the Iran situation will be resolved relatively soon. We need to stay focused on the tail risk of ongoing conflict and disruption. There could still be a possibility that the warring parties refuse to deescalate or show unwillingness to negotiate. Price action could become more volatile if investors panic and/or changing asset flows pressure credit spreads.
Patience and prudence
This environment calls for a patient and disciplined approach to investing, particularly if the ongoing war takes an unexpected turn for the worse and leaves a lasting effect on the global economy. At present, we prefer defensive sectors such as healthcare and consumer staples where we find yields that remain attractive over the longer term. Defensives are also theoretically more robust in a slowing economy. As market volatility around the Iran events increases, attractive opportunities should also emerge in more cyclical sectors.
As always, credit analysis is vital. Avoiding companies that are vulnerable to economic downturns due to weak balance sheets, compromised business models or with governance risks is core to successful high yield investment. We believe that volatility in the credit markets is healthy, setting apart good companies from the bad ones, helping to direct capital towards more robust companies, and diluting long term market risk. It’s also important to ensure that the liquidity of a high yield strategy is managed in such a way that the portfolio can be quickly repositioned to adjust to any emerging scenario.
Active, pragmatic and risk-aware: that’s the investment philosophy we follow. The high yield credit market has over time proven to be a source of attractive risk adjusted return, with many fundamental strengths such as lower default rates than perceived by many, and lower volatility than equities in down markets. The ongoing turbulence in the geopolitical arena provides attractive opportunities for active managers in the high yield credit space to lock in compelling risk adjusted returns for the long term.
Strategy specific risks
- Share Class Hedging Risk - The share class hedging process can cause the value of investments to fall due to market movements, rebalancing considerations and, in extreme circumstances, default by the counterparty providing the hedging contract.
- Interest Rate Risk - The Strategy can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates.e.g. the value of a bond tends to decrease when interest rates rise
- Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
- Contingent convertible bonds - The Strategy may invest in contingent convertible bonds. These instruments may experience material losses based on certain trigger events. Specifically these triggers may result in a partial or total loss of value, or the investments may be converted into equity, both of which are likely to entail significant losses.
- Credit Risk - The issuer of a bond or a similar investment within the Strategy may not pay income or repay capital to the Fund when due.
- Derivative risk - the Strategy may use derivatives to generate returns and/or to reduce costs and the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment
- Liquidity Risk (general) - During difficult market conditions there may not be enough investors to buy and sell certain investments. This may have an impact on the value of the Strategy.
- Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the Strategy's assets.
- Sub investment grade bonds - The Strategy may invest a significant portion of its assets in securities which are those rated below investment grade by a credit rating agency. They are considered to have a greater risk of loss of capital or failing to meet their income payment obligations than higher rated investment grade bonds.
- Charges from capital - Some or all of the Strategy’s charges are taken from capital. Should there not be sufficient capital growth in the Fund this may cause capital erosion.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Past performance does not predict future returns. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and investors may get back less than originally invested. This is particularly true during periods of rapidly changing market circumstances. The views expressed are those of the author(s) at the time of preparation, are not necessarily those of Jupiter as a whole and may be subject to change. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK. In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571. of the Laws of Hong Kong) and in Singapore, accredited and institutional investors as defined under section 4A of the Securities and Futures