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Despite huge growth in renewable energy, modern economies still depend heavily on fossil fuels. Anything that affects fuel prices causes ripples to almost every sector of the economy. That’s happening right now as we continue to feel the shockwaves from the Iran conflict.
As fuel supplies come under pressure, we are seeing price increases across the board, from everyday essentials to building materials.
What does all this mean for your investments?
Well, you can expect significant volatility in the coming months, especially in public markets, which could affect traditional assets such as stocks, property, and bonds.
But that doesn’t mean all investments can expect to suffer the same fate, and it certainly shouldn’t disuade you from investing if you do it the right way.
How the Fuel Crisis is Affecting Australia
Australia sources most of its refined oil from South Korea, Singapore and a few other Asian countries. These countries, in turn, get their crude oil from the Middle East.
Right now, the Strait of Hormuz (which carries a huge chunk of the world’s oil supplies) is the centre of a standoff between Iran and the US, with ship traffic having gone down to a trickle. Attacks on oil infrastructure in various Middle Eastern countries have also contributed to fuel shortages in many countries, including Australia.
Once prices at service stations go up, many other resources follow suit. Transport and logistics costs rise, so consumer products also go up in price. Manufacturing costs increase, again affecting the prices of many products.
In other words, inflation.
Why This Matters For Investors
In March, inflation jumped to 4.6% compared to 3.7% in February. It is likely that the RBA will hike interest rates in an attempt to cool inflation, with some experts predicting multiple hikes this year.
This can worry some investors. When interest rates go up, traditional assets are typically the hardest hit. These include:
- Bonds – they move inversely to interest rates. When rates go up, prices of existing bonds fall as they become less attractive.
- Shares – higher interest rates signal higher borrowing costs for companies and thinner margins. This causes share prices to fall.
- Property – higher interest rates means higher borrowing costs, which suppresses property demand.
Impact on Private Credit Investments
Diversifying your portfolio is the best way to reduce the impact of market volatility. Look to assets with low market correlation, such as private credit.
Private credit involves lending money to businesses that struggle to get traditional bank financing. Investors provide the capital that private credit providers use to finance businesses. They earn returns from the interest that borrowers pay on their loans.
Since private credit investments are not traded on public markets, they are less exposed to market volatility. So even when shares are going up and down, private credit tends to stay quite stable.
In fact, investors can sometimes benefit from the higher interest rates.
Another factor that contributes to the stability of private credit is that it’s income-driven rather than market-driven. So it doesn’t matter as much what’s happening in the markets, as long as borrowers are still servicing their loans, your investment stays stable.
Furthermore, these loans are backed by contractual agreements and collateral, providing additional assurance to investors.
Benefits of Private Credit When There’s a Fuel Crisis
When a fuel crisis hits, traditional assets can become volatile with risk of capital losses.
In contrast, private credit tends to hold steady, providing stable, predictable income to investors.
It’s a great way to diversify your portfolio and reduce exposure to volatility in the short-term. It’s also a safe choice for investors who want to grow their investment income over the long-term.
Private Credit is Not Risk-Free
No investment is risk-free, and private credit is no different. Hard economic times can affect borrowers’ ability to repay loans, and the liquidity of private credit might not suit the needs of every investor.
That said, we conduct rigorous due diligence to ensure the borrowers we lend to have the capacity to repay their loans, even in the event of consecutive interest rate rises. We also provide expert guidance and fair loan terms to make it easier for them to repay their loans, which is why our private credit fund investors can continue to invest with confidence, even during an economic downturn.
Diversify Your Portfolio With PSA Capital Investments
The PSA Private Credit Fund delivers returns averaging 8% p.a., providing a low-risk income opportunity for investors. We prioritise capital security, with multiple measures in place to protect your money and maintain steady returns even during market volatility.
Contact us today at (03) 9847 7689 to discuss available investment options.
Disclaimer: The information contained in this document is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs.
