If the economy enters a recession, it is a problem for all credit markets. But there are also situations where only one sector is hit by some shock, while the rest of the economy is fine.
This is the situation we are in today with software.
For software, the problem is not only the threat from AI but also the rise in the cost of capital following the Fed’s 2022 interest rate hikes.
History is full of episodes where changes in the cost of capital and sector-specific factors have created opportunities in credit markets, see chart below. For example, the energy credit cycle from 2014 to 2016, the brick-and-mortar retail cycle from 2016 to 2019 and the commercial real estate cycle from 2022 to 2024.
The bottom line is that individual sectors of the economy can be in distress while the rest remain fine. In fact, that is what creative destruction and disruption are all about.
In short: In a capitalist economy where new products are invented every day, the only constant is change, and that is where opportunities arise for credit investors.
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