Mid-Year 2026 Investment View: Global Credit

Summary

• Corporate credit remains supported by resilient earnings momentum and attractive total yields.

• Income is likely to drive returns, with high yield and investment grade still offering meaningful coupon potential.

• Higher energy prices, AI disruption and regional growth divergence are creating clearer winners and losers.

• Selective exposure remains key, with a focus on resilient issuers and caution on CCC credit, Europe and long duration.

What did H1 change for global credit?

The first half of the year reinforced the case for corporate credit versus government bonds, but it also made the market more divided. The biggest change has been the Iran conflict and its impact on inflation, growth and earnings expectations, primarily through higher oil prices. This improved the outlook for energy and some parts of chemicals but created pressure for companies that use oil or energy as an input cost and cannot pass that through.

This is where selection matters. We are looking closely at whether higher energy prices create a margin squeeze, a demand shock, or both. The risk lies in companies facing higher input costs at the same time as weaker end-market demand. The full impact is not yet visible, as the Q1 reporting season only captured the early stages of the conflict, when many companies and consumers still expected a quick resolution.

AI has also become a more important topic for credit. AI investment and data-centre construction continue to support US growth, while fears of a collapsing labour market have eased into more of a ‘no hiring, no firing’ environment. At the same time, AI is challenging parts of software, media and technology where business models or terminal values are being questioned.

Overall, earnings momentum has improved despite the volatility. Outside the sectors most directly affected by oil prices, companies continue to deliver resilient results. 

Where does income still compensate for risk? 

The strongest case for credit remains income. Spreads may not fully compensate investors for downside risk, but total yields remain attractive, with high yield at around 7% and investment grade above 5% in USD. 

In a non-recessionary environment, that income can continue to do a lot of the work. Investors can potentially earn 7–9% per year from high yield through coupon income, with relatively modest movement from rates or spreads if total yields stay range-bound.

We view defensive, developed market high yield as a core fixed income building block. It can provide a stable source of income through time, while allowing investors to take more selective risk elsewhere. Current yields are not at an extreme in either direction, but they still justify an above-neutral allocation.

How are you balancing quality and opportunity? 

Our approach is to stay selective and avoid the most vulnerable parts of the market. We remain underweight CCC-rated credit because we do not think today’s environment favours the lowest-quality issuers.

CCC companies often need stronger revenue growth to support their capital structures, but the market now faces a weaker growth backdrop. Many also remain exposed to higher-for-longer interest costs, particularly where they have floating-rate debt or refinancing needs. At the same time, raw material inflation, weaker demand and structural disruption are putting additional pressure on margins in some sectors.

Housing-related sectors highlight the risk. High mortgage rates have reduced housing transaction volumes and created pressure in areas such as building products. In software, media and parts of tech, AI is challenging business models and terminal values. For us, this is not an environment to reach aggressively into the lowest-quality part of the market.

Where are you cautious?

We are cautious on Europe, CCC credit and very long duration.

Regionally, Europe is more exposed to higher energy prices because it imports more oil and is more dependent on Russian or Middle Eastern gas. While US growth expectations have improved, European growth forecasts have come down. The UK shares some of Europe’s vulnerabilities: it is a large energy importer; it entered the crisis with a more fragile economy than the US and faces additional political uncertainty.

By sector, we are cautious on housing, distressed media, software, pure retail, consumer discretionary and travel. The common threads that impact these sectors are vulnerability to higher rates, pressure on discretionary income, weaker demand and structural disruption. We view the US consumer as a particular area of vulnerability, given high interest rates, elevated food and gasoline inflation, low savings and high personal debt levels.

We are also cautious on very long duration. Inflation has not risen as much as feared so far, and the interim US-Iran deal has reduced the immediate escalation risk. However, energy markets remain vulnerable while traffic through the Strait of Hormuz normalises and shipping backlogs clear, and the second-round inflation effects have yet to be seen. Fiscal deficit concerns and sharp moves in long-dated government bond yields also support a conservative duration stance.

How are you positioned, and where would you add if volatility creates better entry points?

There are also potential upside surprises. M&A and leveraged buyout (LBO) activity is re-emerging, helped by lower valuations, easier We remain focused on corporate credit rather than sovereign debt. We are conservative on duration and underweight Europe. By sector, we are overweight financials, which benefit from a higher-rate environment, and overweight energy, where we expect commodity prices to remain high. We also hold defensive exposure through consumer goods and telecoms.

We would add corporate credit if volatility drove meaningful spread widening, especially if markets priced in a weaker growth outlook too aggressively. We have also already added some duration as markets began pricing in rate hikes. Our framework is straightforward: when markets price in two cuts, we want to be shorter duration; when they price in two hikes, we become more willing to add duration, because the market may have moved too far.

In our global strategic bond strategy, high yield exposure stands at around 30%, versus a maximum of 40%. We think that level fits the current yield environment while preserving dry powder to add if valuations improve. If high yield yields moved towards 8.5–9%, we would be ready to lean further into that exposure.

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