How AI, stagflation risks and private credit are reshaping credit opportunities

Credit markets are entering a more complex phase in 2026, as a previously supportive backdrop gives way to heightened geopolitical uncertainty, evolving inflation dynamics and increasing scrutiny of structural shifts such as AI and private credit. While these developments are tightening financial conditions and increasing uncertainty, they are also starting to reopen a more attractive opportunity set after a period of historically tight valuations. As a result, clients are increasingly focused on navigating these dynamics to support effective risk management and portfolio positioning.

In the current environment, I see three key forces shaping credit markets:

• The Iran conflict is raising stagflation risks
• AI capex is driving supply and creating opportunities in credit, while increasing dispersion
• Segments of private credit are becoming a source of increased uncertainty

A shifting credit backdrop

At the start of 2026, credit markets were characterised by strong fundamentals and historically tight valuations, supported by resilient growth, a healthy consumer, an accelerating AI-driven capital expenditure cycle and still-accommodative financial conditions. Since then, a confluence of factors, including geopolitical uncertainty linked to Iran, renewed stagflation concerns driven by the energy shock and growing scrutiny of AI-related disruption and private credit, has shifted the backdrop. While uncertainty has increased, improving valuations have reopened opportunities that had been compressed in recent months.

The Iran conflict is raising stagflation risks

The Iran conflict represents a stagflationary impulse, primarily through higher energy prices and their knock-on effects on inflation expectations and monetary policy. In response, central banks are likely to delay further easing and, in the European Central Bank’s (ECB’s) case, may even consider renewed tightening given its inflation mandate and experience in 2022. While our base case remains that a global recession can be avoided, this environment is expected to tighten financial conditions and weaken a previously supportive backdrop for credit markets. We expect these conditions to create greater dispersion across credit markets.

AI capex is driving supply and creating opportunities in credit, while increasing dispersion

Despite the Iran conflict, AI remains the most important secular force shaping both opportunities and risks in credit. We view AI adoption as a multiyear, economy-wide process unfolding in stages. Research from our technology team suggests that the infrastructure build-out alone could reach up to 331 GW of global data center capacity by 2030, requiring approximately US$18 trillion in cumulative capex across the data center ecosystem, with the majority concentrated in the US. The build-out of the AI “compute stack” —including data centers, power, networking and hyperscaler infrastructure — is already a meaningful driver of economic growth, as evidenced by its contribution to US growth in 2025. At a sector level, this capex cycle is supporting growth across technology, utilities, electrical equipment and select areas of real estate.

Over time, AI adoption is expected to broaden across the economy, particularly in service sectors, with the potential to increase annual productivity by around 1%, albeit with a wide range of outcomes depending on the scope of automation. The inflationary impact is likely to evolve over time: near-term infrastructure investment may contribute to inflationary pressures by stretching supply chains in already tight economies, while broader adoption could ultimately reshape cost structures, labour dynamics and pricing power.

What AI could mean for credit investors

From a credit market perspective, the AI capex cycle is driving sustained and significant financing needs that are increasingly being met through public bond markets. Very large and frequent issuance from high-quality issuers has restored meaningful new issue concessions, while project-level and secured financing structures are introducing additional relative value opportunities for investors able to navigate greater complexity.

At the same time, I believe that the increasing capital intensity of business models and rising leverage are creating more selective opportunities. We favour companies with diversified revenue streams and strong management teams, which we believe are better positioned to navigate uncertainty around technological development and return on investment.

The scale of expected issuance is also likely to reshape market structures and technicals. In particular, we expect technology issuers to account for a larger share of corporate bond indices — especially in USD markets. We also anticipate that sustained supply should, over time, contribute to more normalised spread levels, greater dispersion across credits and steeper credit curves.

Beyond infrastructure, AI is also creating opportunities — and risks — among legacy businesses facing disruption. Companies’ responses to this uncertainty may include shifts in capital allocation, such as increased leverage to fund investments, M&A or share buybacks. These dynamics could result in substantial funding programs in debt markets, creating opportunities where underlying business models have defensible moats.

As AI technology is adopted more broadly across the economy, entire sectors can face perceived disruption risks. Recent developments in the software sector highlight how quickly sentiment can shift, with SaaS (Software-as-a-Service) business models becoming seriously questioned following advances in AI model capabilities. Significant uncertainty around the terminal value of SaaS businesses — reflecting concerns about growth assumptions, pricing power and the emergence of new competitors — has led to a sharp repricing in equity valuations and a corresponding increase in credit risk premia. In this context, identifying companies with defensible moats is critical. In SaaS, such moats may stem from ownership and control of proprietary data, deep customer integration and domain control. This selectivity is key to avoiding credits with an increasing likelihood of unfavourable outcomes over time.

Segments of the private credit market are becoming a source of increased uncertainty

In addition, parts of the private credit market — particularly direct lending — represent another source of uncertainty. Rapid growth, looser underwriting and valuation opacity, particularly in AI-exposed sectors such as software, have weighed on public issuers with private credit linkages, including business development companies (BDCs) and insurers. Concentrated exposure to sectors affected by potential AI disruption, along with increased retail redemption requests from private credit evergreen funds, have added to concerns about the onset of a credit cycle in segments of private lending.

More broadly, we view private credit as a diverse set of markets with varying risk profiles, where direct lending dynamics are not representative of the entire asset class. While we see vulnerabilities related to refinancing risk, valuation opacity and potentially concentrated investor bases, we do not view private credit risks as systemic, as leverage levels are generally moderate and exposure within the banking system remains manageable. However, given the important role private credit has played in supporting the credit cycle in recent years, particularly in below investment grade corporate credit, stress in this segment could lead to tighter financing conditions, stricter underwriting standards and increased dispersion across public credit markets.

The outlook for credit

While credit markets are currently navigating heightened uncertainty and a range of risks, this environment is also creating opportunities. Barring a tail-risk scenario in which the Iran conflict triggers a global recession, we expect economic activity to remain resilient and the credit cycle to continue, supported by solid nominal GDP growth. We expect spreads to trade in a broader range than in recent periods, constrained by higher supply and disruption risks, but supported by solid fundamentals in a world of high nominal growth and continued demand for yield. In this environment, higher all-in yields, increased dispersion and a more active primary market are improving the risk-reward profile for disciplined credit investors.

Implications for active investors

I believe credit investors should seek to emphasise stable cash flows and fundamentals and favour attractive entry points created by technical pressure rather than deteriorating credit quality. I see particular value in shorter to intermediate maturities and sectors such as banks, telecoms and utilities, while being more cautious in cyclical areas.

Regionally, we see euro-denominated credit offering attractive local/hedged yields and expect it to perform more defensively in an AI-driven disruption scenario. We see the primary market as a particularly attractive area to add exposures, supported by the return of healthy new issue concessions and the likelihood of further dispersion being priced into secondary markets over time.