The escalating crisis in the Middle East could have implications for pension schemes’ credit allocations, Isio has warned.

Discussing the market implications of the conflict, Isio chief investment officer, Barry Jones, highlighted that rising tensions in the Middle East were adding complexity to an “already fragile” global backdrop.

“Markets are still assessing what this means in economic terms, and at this stage the range of potential outcomes remains wide,” he said.

"For investors, the key question is how - and whether - geopolitical developments translate into macroeconomic pressure.

“If events were to feed through into higher inflation expectations or weaker growth, that would have implications for bond yields, credit markets and currency positioning.”

Jones noted that movements in long-dated yields were particularly important for pension schemes.

While he acknowledged that the liability-driven investment (LDI) framework was significantly more robust now than it was in 2022, sharp or disorderly yield moves would still need careful liquidity management.

A government bond sell-off coinciding with weakness in credit assets used for collateral was identified as the key risk, as this would crystalise losses for pension schemes.

Isio was also closely monitoring credit markets, especially securitised assets.

“Pension schemes have increased allocations to asset-backed securities (ABS) in recent years because of their structural protections and relative value at higher credit ratings but do introduce consumer risk into portfolios,” Jones added. “High-quality ABS remains resilient.”

Sections of the securitised market, especially lower-rated tranches with direct exposure to household borrowing, would be more sensitive if inflation placed further pressure on consumers, he noted.

“In this environment, differentiation within the asset class is critical,” Jones said. “The focus should remain on quality, structure and underlying credit fundamentals.

"At this stage, the priority for trustees is resilience - ensuring portfolios are structured to withstand a range of outcomes while avoiding reactive changes based on short-term developments.”

---