You can tell a market is getting nervous when investors start talking more about what might go wrong than what might go right. UBS’s latest global credit strategy note lands firmly in that camp. Its analysts are already framing 2026 around AI risk, late-cycle credit jitters and a widening gap between the US and Europe.
The tone is not apocalyptic, but it is wary – and that caution shapes a set of trades that, while global in scope, carry familiar implications for UK investors.
UBS says it entered 2025 “defensive prematurely”, expecting US tariff pressures to bite earlier than they did. That view only paid off late in the year.
Even so, the bank’s call on a growing performance gap between US and European credit, so-called beta divergence, meaning European credit outperforming, worked throughout the back half of the year and is expected to continue into 2026. The upshot is a new portfolio tilted toward resilience rather than heroics.
The headline concern is the US credit cycle. UBS expects a “soft patch into H1 2026”, saying tariff-driven cost pressures and a fragile labour market will weigh on growth.
Its strategists warn of “modest widening” in US investment-grade and high-yield credit as companies continue to add leverage and defaults tick up. In simple terms, the bank thinks the US is late-cycle, and credit investors should behave accordingly.
That anxiety takes a few forms. One is a hedge against an “AI bust or AI disruption” – a roughly 25% probability event, in UBS’s language.
The proposal is to buy credit default swap protection on a basket of US banks with greater exposure to private credit, funded by selling protection on insurers that have “limited private credit exposure due to liquidity needs.”
Jargon aside, the idea is to take out insurance on lenders most exposed if AI hype turns to disappointment, and pay for it with the relative stability of insurers.
Another trade sticks with the US, going long industrial high-yield debt relative to the broader high-yield market. UBS argues that spreads in basic industrials sit more than two standard deviations above average, with fundamentals set to improve as larger companies push through cost cuts and deleveraging plans. Only 2% of sector debt matures in 2026, which helps.
Retailers, by contrast, come under pressure. UBS notes “consumer cracks” as auto sales soften, sentiment slips and delinquencies rise. Tariffs, again, loom large. The bank expects earnings momentum to remain negative into next year and suggests shorting retail high-yield debt against the wider universe.
Europe provides something of a counterweight. UBS expects a “J-curve” recovery: weakness giving way to a firmer upswing from the second quarter onward as fiscal stimulus kicks in.
Even so, it emphasises the risks of delayed spending programmes in Germany and wider EU budgets, plus ongoing trade pressure from China. The focus is on selectively adding exposure without relying on heroic macro assumptions.
One favoured idea is to go long lower-volatility European B-rated bonds versus the most volatile CCCs. The logic, UBS says, is as much psychological as fundamental: managers want to lock in strong relative performance for the year-end snapshot, and are more willing to trim the riskiest names.
Chemicals, however, are singled out as vulnerable. UBS flags “low volumes and weaker pricing driven by excess supply from China” and notes that margins have stagnated even as spreads have kept tightening. For a sector tethered to German fiscal plans, any delay becomes a credit-risk issue, so the bank recommends shorting investment-grade chemicals versus the broader index.
On the other side of the ledger, European investment-grade consumer products earn a nod, supported by emerging-market revenue exposure and what UBS describes as defensive cash flows. Corporate hybrids, the halfway house between debt and equity, also remain in favour: UBS highlights their “materially lower beta” in sell-offs and ability to offer quality at a relatively modest reduction in yield.
UK-listed credit issuers are woven through many of these sectors – from consumer staples to chemicals to hybrid-heavy utilities – so the relative calls matter. But the broader message is more straightforward: 2026 is shaping up as a year to be discriminating rather than bold. Theft or fortune may favour the brave, but UBS seems to be siding with the cautious.