Steering buy & maintain credit through geopolitical uncertainty

It’s an entirely fair question. Periods such as today test whether long‑term investment philosophies genuinely hold up under pressure. For us, the answer is clear: a B&M approach should be designed to withstand environments like this.

Impact on markets thus far

Market volatility has been evident in government bond markets, with sterling gilt yields rising sharply. Credit markets have remained relatively resilient, with only modest widening in spreads from historically tight levels, supported by strong underlying demand for carry and still‑limited primary issuance. 

The key macro transmission channel remains energy: while oil prices have come off their highs, they remain well above pre‑conflict levels, leaving inflation risks skewed to upside surprises if geopolitical tensions persist or shipping disruptions re‑emerge.

Staying disciplined when headlines accelerate

At L&G, we believe that B&M portfolios should be built on a philosophy that values resilience over reactivity. That means focusing on high-quality issuers, strong balance sheets, robust governance and predictable cashflows, and importantly maintaining that discipline even when markets feel noisy.

Geopolitical conflict can create discomfort, but it doesn’t automatically translate into portfolio upheaval. We do not pivot portfolios in response to short-term headlines; instead, we assess developments through a fundamental, medium-term lens.

Understanding the transmission channels and unresolved risks

Geopolitical events can affect credit portfolios through a range of channels, and in some circumstances may have direct issuer specific implications. In a well-diversified buy & maintain approach, however, the more typical impact can potentially be indirect, emerging through broader macro and market dynamics rather than immediate credit stress.

Importantly, today’s environment is defined by a stacking of unresolved risks: geopolitical conflict, evolving inflation dynamics, rapid AI‑driven disruption and ongoing questions around private credit and market structure. These risks remain fluid, with no clear timetable for resolution. Depending on how events evolve, markets may move towards greater confidence, or towards heightened caution and risk aversion. History shows that periods where multiple uncertainties overlap are harder to price consistently and can lead to episodic volatility.

Against that backdrop, our focus is on the transmission mechanisms most likely to shape medium-term credit outcomes:

• Energy prices and their impact on input costs
• Inflation expectations and interest rate paths
• Risk sentiment and liquidity conditions
• Structural disruption, including the uneven impact of AI adoption across sectors

These are the levers that matter most for long‑term credit performance.

Can B&M hold up when downgrade/default risk rises?

Periods of rising downgrade or default risk are the kind of environments in which buy and maintain portfolios have historically demonstrated relative resilience versus index led strategies. This is largely due to three structural features:

1. A quality bias: a B&M approach is built with a deliberate focus on issuers with robust balance sheets and business models that produce predictable and resilient cashflows across business cycles. When downgrade cycles accelerate, the dispersion between higher-quality issuers and the broader market widens.

2. Lower turnover and reduced forced-selling risk: When fundamental credit quality comes under pressure this can lead to forced selling upon or in expectation of credit rating downgrades (particularly to high yield). This typically coincides with wider credit spreads in combination with reduced liquidity and higher trading costs. A B&M approach can avoid leakage of value through reduced turnover in times of higher bid/offers but in particular by avoiding being a forced seller due to downgrades.

3. Diversification: By seeking to unshackle portfolios from traditional credit indices, a B&M approach can take broad exposure to global credit markets by issuer, sector, country of risk and currency. Diversification aims to provide a second line of defence to individual credit selection in times of uncertainty, whether driven by geopolitics, the economic cycle or technological disruption.

Markets remain orderly, so far

Despite recent headlines, credit markets have so far remained orderly. The volatility observed to date looks more like a repricing of risk premia than evidence of a significant deterioration in underlying corporate fundamentals at this stage. Most issuers continue to demonstrate operational resilience and balance‑sheet strength: qualities we deliberately prioritise within our B&M framework.

If conditions were to change materially, we would respond in a measured, deliberate way, anchored by a mandate’s long‑term objectives and, where applicable, net-zero alignment and mandate‑specific constraints.

Active monitoring without abandoning the long‑term view

That doesn’t mean we sit still. Our teams continuously assess how higher energy prices, central bank‑ responses and market dislocations may influence credit fundamentals. Our active monitoring seeks to identify, inter alia, relative value opportunities. When these emerge (whether across issuers, sectors or maturities) we consider them carefully and selectively, ensuring any adjustments remain fully aligned with long-term objectives.

A philosophy built for durability

Periods of geopolitical uncertainty remind us why a long-term, fundamentals driven approach matters. A B&M approach seeks to weather volatility, not chase it. By focusing on issuer strength, cashflow visibility and disciplined credit selection, we aim to deliver resilience in the short term and value over the long term, within a consistent, transparent framework when outcomes remain uncertain.

 

It should be noted that diversification is no guarantee against a loss in a declining market.