We are excited that 2025 began filled with potential opportunities. Reviewing the global macro environment in the months of January and February 2025 provides us with good insights into the economic landscape, key trends and potential growth areas for the year.
2025 started with significant geopolitical developments, particularly in the wake of the U.S. presidential election and escalating tensions across Europe and the Middle East. U.S. President Donald Trump’s recent decisions have further complicated the global economic landscape.
On March 3, 2025, Trump imposed tariffs of 25% on imports from Canada and Mexico, along with an additional 10% tariff on Chinese goods, on top of the 10% imposed the previous month. A similar 25% tariff on imports from the European Union is expected to follow. Together, these four economies account for 61% of U.S. imports. In addition, Trump suspended U.S. military aid to Ukraine, marking a dramatic shift in U.S. foreign policy. These policy changes have introduced significant uncertainty into global markets, adding to the volatility caused by existing trade tensions and geopolitical shifts.
While the extent of the tariffs’ impact remains unclear, they are expected to create substantial volatility. While the U.S. government aims to stimulate domestic growth, these tariffs could hurt global economic expansion, affecting countries worldwide, including Australia. From an Australian perspective, these tariffs could exacerbate the challenges the economy has faced in recent years. The Australian Bureau of Statistics reports that Australia’s GDP has had sluggish growth in 2023 and 2024, and these tariffs—particularly those targeting exports to China, Australia’s largest trading partner—could create additional pressure potentially stifling economic progress. These tariffs could lead to financial stress among Australian and New Zealand corporations already dealing with slow market conditions.
Source: Australian Bureau of Statistics, Australian National Accounts: National Income, Expenditure and Product December 2024
The Australian distressed credit market will likely feel the strain of these geopolitical tensions and economic disruptions as businesses face mounting pressure due to trade disruptions, rising input costs, sluggish domestic demand, and the likelihood of defaults and credit distress increases. Sectors most vulnerable to these pressures include manufacturing, retail, and export-driven industries directly impacted by tariff increases and supply chain disruptions. These challenges will pressure Australian corporates, particularly those with weaker balance sheets or high debt loads. The resulting financial stress is expected to increase distressed debt opportunities as companies seek to restructure or liquidate assets to stay afloat.
The rising uncertainty in global markets and tightening financial conditions may lead to higher credit risk premiums. This could make financing more expensive and less accessible for some companies, particularly those in sectors exposed to international trade. Lenders and investors in the distressed credit market must exercise caution, weighing the potential for higher returns against the increased risks associated with a volatile global economic environment. As companies grapple with financial difficulties, the distressed debt space could see an uptick in restructuring deals, where investors may acquire distressed assets at a discount. This presents an opportunity for those with capital to invest in underperforming businesses, particularly in sectors that might rebound once the geopolitical and economic volatility subsides.
On a positive note, U.S. policies have strengthened the U.S. dollar against the Australian dollar, which makes investments in Australia more attractive to U.S. investors. This allows Australian corporations to seek funding from U.S. investors or explore mergers and acquisitions with U.S. buyers, whether they are seeking strategic or financial investments.
Source: Reuters
The broader impact of these U.S. tariffs is particularly significant for China’s economy. The tariffs increase the cost of Chinese goods exported to the U.S., potentially reducing demand for Chinese exports as U.S. buyers seek alternative sources for their imports. Given that the U.S. is one of China’s largest trading partners, a decline in exports to the U.S. could have a substantial negative effect on China’s GDP growth.
Additionally, China’s deep integration into global supply chains means that the tariffs could raise production costs for Chinese manufacturers, especially those relying on U.S. imports for raw materials and components. These increased costs could lead to inefficiencies, slowing production, and potentially further curbing growth. Higher production costs may also be passed onto consumers, which could reduce domestic consumption—a critical driver of China’s economy. If China retaliates by imposing tariffs on U.S. goods, the effects could be even more profound. Retaliatory tariffs could negatively impact Chinese industries that rely on U.S. imports, such as agriculture, technology, and automotive. This could further constrain China’s economic growth and dampen investor confidence. Furthermore, foreign investment in China may slow, as companies hesitate to enter a market where trade uncertainties persist. This would hinder China’s ability to attract new capital, technology, and expertise, limiting its long-term growth potential.
Globally, the ripple effects of these trade tensions could lead to reduced demand for Chinese goods, further slowing its GDP growth. The World Bank recently raised its 2024 growth forecast for China to 4.9% but forecasts a slowdown to around 4% by 2026. This suggests that the global economic environment and trade disruptions may limit China’s growth prospects in the coming years.
While Australia has opportunities to attract U.S. investment, the ongoing trade disruptions could exacerbate economic difficulties. Similarly, China faces a period of heightened uncertainty, with trade tensions likely to slow its economic growth. As these global dynamics unfold, the long-term impact on the U.S. and its allies remains to be seen, while the distressed credit market in Australia is poised for increased activity as companies struggle with mounting financial pressures.
Investment Objective & Strategy
The investment objective of Arbitrium Credit Partners Fund Class ("the Fund') is to outperform the Reserve Bank Overnight Cash Rate by 600 basis points per annum through investment in opportunistic, stressed, or distressed loans to mid-market Australian corporates.
The Fund’ investment strategy is focussed on lending to stressed and distressed mid-market corporate loans and is well placed to assist corporates going through such periods of financial stress or distress. The Fund invests in debt secured by collateral (property, plant and equipment, cash, receivables), including senior secured loans, subordinated secured loans, uni-tranche loans, and hybrid (convertible) loans. The Fund invests in pre-restructure and post-restructure debt, subject to our assessment. The Fund aims to enhance the returns from instruments such as equity warrants, convertible notes and exit fees.
In 2025, both distressed credit funds and direct loan funds will serve critical, complementary roles in Australia’s financial ecosystem. Distressed credit funds offer high-risk, high-reward opportunities tied to market dislocations, while direct loan funds provide steady, income-focused options for investors seeking stability in a higher-rate environment.
We invite you to explore these opportunities with us as we navigate the year ahead together.
Disclaimer
This information is provided by Arbitrium Credit Partners Pty Ltd ACN 644 484 659, holder of an Australian Financial Services Licence (No: 532796).
This general information is provided in confidence to the wholesale client investors of Arbitrium Credit Partners Fund Class A Units. It is not intended for public circulation or publication or for the use of any third party, without the approval of ACPPL. It does not take into account personal objectives, financial situation or needs. Before acting on this information, investors should consider its appropriateness based on their person circumstances, obtain a copy of the relevant offer document, and consult their investment advisor before doing so.
Numerical figures have been subject to rounding. All amounts are in AUD, unless indicated.
Past performance is not a reliable indicator of future returns. Certain information contained herein constitutes "forward-looking statements," and because of various risks and uncertainties, actual events or results or actual performance may differ materially from the events, results or performance reflected or contemplated in such forward-looking statements.
The market commentary reflects Arbitrium's views and beliefs at the time of preparation, which are subject to change without notice. No representations or warranties are made by Arbitrium as to their accuracy or reliability. To the extent permitted by law, no liability is accepted by Arbitrium for any loss or damage as a result of any reliance on this information.
This Newsletter is current as of March 2025 unless otherwise indicated, and subject to change without notice.
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