Australian credit markets are undergoing a clear shift, with investors becoming increasingly selective as macroeconomic uncertainty builds, driving a strong rotation toward high-quality issuers, Helen Mason, Schroders’ head of credit says.

With ongoing conflict in the Middle East delivering unprecedented global oil supply disruption, financial markets have struggled to gain a clear read on inflation or growth.

For Australian businesses, the impact is already filtering through. Mason says higher fuel costs are acting as an immediate drag on consumers, with flow-on effects expected across retail, travel and discretionary sectors.

“Higher petrol prices hit households quickly and broadly, which weighs on spending,” Mason says.

“That has clear implications for sectors like retail and travel, where we would expect to see softer demand.”

Companies such as Ampol, Qantas and Air New Zealand are likely to feel the impact of weaker travel demand, while retail A-REITs may also face pressure as consumer activity slows.

Despite the more cautious tone, primary markets have remained active, with issuers including NBN, Dalrymple Bay Coal Export Terminal, Charter Hall Finance, MyState Bank and Meridian Energy successfully accessing capital with healthy demand.

“This level of activity highlights that demand for credit is still there,” Mason says.

“But it’s highly selective. Capital is flowing to issuers that can offer certainty and resilience in an uncertain environment.”

At the same time, higher-beta issuance has begun to stall. Mandates from names such as Qantas, NextDC and Investa Commercial Property Fund were delayed or pulled as investor appetite softened through the month.

“That divergence is telling,” Mason says.

“The market is clearly drawing a line between defensive, high-grade credit and anything perceived as more cyclical or exposed to economic slowdown.”

Even global issuers have tested the market, with US telecommunications giant Verizon launching a $1.3 billion subordinated deal in Australian dollars. Mason noted pricing was tight relative to conditions, with the bonds underperforming shortly after issuance.

“It’s a good example of how quickly sentiment can shift. Even high-quality global names are not immune if valuations don’t stack up in a more volatile backdrop.”

The repricing in credit reflects a broader adjustment across markets, with rising input costs, persistent inflation and tighter financial conditions increasing pressure on corporate earnings and refinancing.

Mason added that growing dispersion in credit spreads is beginning to create more attractive entry points for active investors.

“For a long period, spreads were compressed across the board,” Mason says.

“Now we’re starting to see genuine differentiation, which creates opportunities to add value through careful security selection.”

Looking ahead, uncertainty is expected to remain a defining feature of markets, with the path for credit dependent on how macro conditions evolve.

“The range of outcomes remains wide, and that calls for discipline,” Mason says.

“Investors need to stay selective, focus on quality and be prepared for continued volatility.”