The war in Iran has caused equity markets and government bonds to sell off, but credit markets have not followed suit, warned Adam English, manager of the £184m M&G Credit Income investment trust.
US intervention in the Middle East is the biggest risk to global supply chains since the Covid pandemic, he said, with global equity markets “flirting with” or already breaching technical correction territory.
Similarly, inflationary pressures stemming from the spike in oil prices following the closure of the Strait of Hormuz have driven a “rout” in government bond markets, with the five-year gilt hitting its highest yield since 2008.
“However, we have not yet seen a sell-off in credit,” he said in the trust’s annual results to the end of December 2025.
As a result, “credit spreads remain anchored and still screen as expensive when viewed through a historical lens” despite “the global macro volatility and heightened risk environment”.
“Investors certainly are not being compensated for the myriad short- and medium-term uncertainties they must consider, or for the plausible scenario of a sustained energy supply disruption,” he added.
It is for this reason the manager is positioning his portfolio to be a net beneficiary of any future credit spread widening or market volatility by taking a cautious stance and improving the overall credit quality within M&G Credit Income.
At present, the trust has “a significant amount of capital invested in AAA/AA ABS [asset-backed securities] funds ready to be reallocated, as well as a £40m credit facility,” the manager said.
English is waiting for attractive entry points to take on additional credit risk, which he noted usually occur when volatility driven by macroeconomic factors drives dislocations between credit fundamentals and valuations.
Winterflood Securities analyst Shavar Halberstadt noted English is “ready to pounce upon more generalised credit market volatility”.
“This would certainly seem to be a plausible scenario given volatility in listed markets and private credit, and thus we continue to view MGCI as a compelling complementary holding.”
However, the trust’s positioning has not been fruitful in the short term. It failed to beat its SONIA +4% in the 12 months to the end of 2025, with its net asset value (NAV) total return of 6.2% some 2.3 percentage points behind the benchmark (8.5%).
Chair David Simpson said the trust has “rarely achieved” outperformance versus the benchmark in recent years. “This reflects both the prevailing market environment and the company’s investment approach, which prioritises income generation and lower asset value volatility over the pursuit of benchmark-matching total returns in all conditions,” he noted.