Market Risks: Is a Perfect Storm Brewing?

The old and proven recipe for investment success – buying on dips – may no longer work. In the world economy and financial markets, a very dangerous cocktail of high inflation again, problems in the financial sector in the area of ​​private credit providers (so-called private credit) and also artificial intelligence, which may not only help companies increase productivity, but can also destroy their entire business, is starting to mix. Paradoxically, fear also reigns in the bubble around AI.

“The risk in the markets has certainly increased. The hedge fund managers we work with are therefore reducing the risk in their investments and waiting for the situation to calm down,” explains Martin Burda, chairman of the board of directors of the investment company Sirius.

And this at a time when world stock markets are close to their records after several years of sleepy driving. In particular, the world’s largest stock exchange in New York has grown at a double-digit rate every year for the past three years, according to its key indicator – the S&P 500 index. The last time US stocks achieved similar results was during the tech bubble at the turn of the millennium.

“These are all risk factors. Normally, each of them could trigger at least a partial sell-off. And especially when they act together,” says Michal Stupavský, chief investment strategist of the Conseq group, regarding the mentioned risks. For now, however, markets remain calm, which he attributes to “still clinging to the recent past and slowly reflecting significant price-setting information.”

However, the US-Israeli war with Iran may be the proverbial last straw that will cause problems for the entire world economy. But many investors still find it prudent to play down their fears about the war, which Gavekal Research economist Anatole Kaletsky says is “a complete misunderstanding of history” given its impact on energy and fertilizer supplies.

Despite the declared victory declaration by US President Donald Trump, the conflict is escalating. An Iranian gas field was hit on Wednesday, prompting Iranian officials to respond by threatening to attack energy infrastructure in other Gulf countries. Subsequently, the Iranians also struck the largest plant for the production of liquefied natural gas (LNG) in the world, which is located in Qatar. Qatar’s state-owned utility QatarEnergy said the attack caused significant damage.

The price of a barrel of Brent oil immediately soared above 115 dollars, and the contract for the supply of gas for the next month rose by 35% above 70 euros per megawatt hour at one point. Stocks and bonds then fell in the past two days, especially on Thursday. “It’s an attack on the energy infrastructure, which scares us the most,” warns Investika’s chief economist Vít Hradil.

Trump’s decision to attack Iran thus caused a new shock to the world economy that will last for a long time. The transport of oil and natural gas through the Strait of Hormuz, through which about a fifth of the world’s oil supplies flows, has frozen. Moreover, the shutdown comes at a time when it is not possible to increase oil production quickly.

According to consultancy Rapidan Energy, this is the largest supply disruption in history. The largest previous one occurred during the Suez Crisis in the 1950s.

Under normal circumstances, 20 million barrels pass through the Strait of Hormuz per day. Saudi Arabia, the United Arab Emirates, Kuwait and Iraq have already reduced production due to the Iranian attacks and the stoppage of traffic in the Strait of Hormuz.

While before the start of the conflict, a barrel of Brent oil cost around 70 dollars, now it is around 115 dollars. However, the increase has already spilled over into fuel prices at gas stations around the world. This increases the costs for industrial companies, logistics or, for example, airlines. However, households also have to reach deeper into their pockets. The more expensive gas then gradually spills over into more expensive electricity. Since the beginning of the year, its price has risen from 27.7 to around 65 euros per megawatt hour.

Europe and Asia, which are more dependent on the import of energy raw materials than the US, will be most affected. The production of chips is particularly energy-intensive, and manufacturers of the most advanced processors are dependent on importing liquefied gas from the Middle East. This will be a structural shock to the entire infrastructure needed for AI.

Moreover, the war in Iran is taking place at a time when investors are already dealing with a range of factors threatening their confidence, which until recently seemed unshakable. “Established practices no longer apply,” Gregory Faranello, an expert on the US interest rate market at Amerivet Securities, told Bloomberg. “It’s impossible to predict how this will develop.”

According to Michael Darda, chief economist at Roth Capital Markets, the price of a barrel of oil could reach $200, surpassing the price of the 1980s and the peak in 2008 after adjusting for inflation. “The likelihood of a long-term energy shock has increased,” Darda told the economic weekly Barron’s.

At the same time, an increase in the price of oil would cause a slowdown in the world economy and, at the same time, an acceleration in the growth of the prices of goods and services. Therefore, Darda increased the probability of a global recession from 40 to 60 percent if the price of oil reaches $200 per barrel. World stock markets would then experience a drop of 15 to 30% from their highs.

In times of increased inflation, instead of lowering rates, as was expected at the beginning of the year, central banks would proceed to increase them. After all, market traders no longer expect the US central bank, the Fed, to cut rates. Any growth would then make loans to companies more expensive, as well as mortgages to households.

However, Iran is only one part of the whole story. Investors are now also concerned about the impact of AI on markets. They fear that it will disrupt entire industries, but also that a bubble is forming in the field of AI. A reversal of the monetary policy of the world’s largest central banks, which will respond to rising inflationary pressures due to rising energy prices, could also contribute to the collapse.

Norway’s sovereign wealth fund, which is the largest in the world, considers the AI ​​bubble even the biggest risk, which could deprive the fund of 35% of its value. Chip manufacturers, as mentioned above, will also have to deal with higher energy costs, as well as helium. At the same time, they are hurt by the strengthening of the US dollar against the currencies of their home countries.

“The problem is that there’s a lot of money going into AI investments, but the revenue is still out of sight. It’s the same as with the internet bubble: the market will clear out,” predicts Burda.

In recent weeks, the markets have also realized that not all companies will make money from AI, which was reflected in the fall in the shares of software companies, but also of asset managers, real estate consulting firms or, for example, rating agencies. Double-digit losses in one day were no exception.

“For example, the performance of Figma shares shows the impact AI is having on its business,” adds Burda. Figma is a cloud-based user interface design tool used by designers, product teams, and developers to create websites.

The company’s stock entered the New York Stock Exchange with much fanfare, shooting up more than 250% to $115.50 on its first day. It now costs around $25, while investors bought it for $33 when the shares were listed.

In addition, it is the effects of AI on software companies that can hit the private sector lending market hard. According to analyzes by the Swiss bank UBS, borrowers will not repay loans from private investment firms in the amount of 75 to 120 billion dollars by the end of this year alone. According to their estimates, companies from the field of software services will destroy AI.

There is already an increase in bankruptcies among borrowers who received private loans, when the proportion of bankruptcies for these loans was 5.8% in January. This is the most since August 2024. In addition, according to Morgan Stanley, this share is expected to increase to 8%.

The size of the private loan market is estimated at $1.8 trillion, according to Bloomberg. With an 8% bankruptcy rate, borrowers would default on $144 billion. After all, investors in funds that provide loans have already gotten scared and started withdrawing deposits en masse. The funds of the aforementioned bank Morgan Stanley and asset manager Cliffwater reacted to this by limiting investment withdrawals, and, for example, asset managers Blue Owl and BlackRock even completely froze this option.

But private loans are not the only problem of the financial sector. In the case of debtor bankruptcies, the first in line will not be creditors from private credit funds, but shareholders. And these are often private equity funds that invest in companies and thus become their owners. An example is the investment of the Vista Equity Partners group in the bankrupt software company Pluralsight, which resulted in a write-off of the entire investment in the amount of four billion dollars.

According to Davidson Kempner hedge fund managing partner Tony Yoseloff, “a significant portion” of the entire private equity industry is in a state of danger or even collapse. According to him, the problems are loans in the amount of 768 billion dollars, which are direct loans and loans for the purchase of companies (so-called leveraged loans).

However, the difficulties of this corner of the financial market may have an adverse effect on American banks as well. According to the credit strategist of the American financial giant Pimco, Lotfi Karoui, they are linked with alternative asset managers significantly more than a decade ago. This follows from data on the volume of loans for financial companies that do not accept deposits. Their volume reached 1.9 trillion dollars, when in 2015 it was only 300 billion. An increase in interest in withdrawals could also put pressure on banking houses.

After all, even the largest American bank JPMorgan Chase & Co. is aware of these risks, which has already limited loans to private credit funds after reducing the value of loans in their portfolio. The head of this bank, Jamie Dimon, warned last October that more “cockroaches” would appear in the once-thriving but non-transparent world of private loans after First Brands and Tricolor Holdings went bankrupt.

In today’s world, when global stock markets are still very high, even a small impulse can have robust effects. It is enough for the first domino to fall – and the whole structure can collapse very quickly.