“If you build it, they will come”.
One of my favourite old movies is 1989’s “Field of Dreams”. In the film, Kevin Kostner wakes up with an idea. To turn a corn field into a baseball field… for ghosts. “If you build it, they will come”, the voice whispers in his head again and again. When this modern Noah finally relents and builds it, the ghosts of the 1919 Chicago White Sox, who had been banned from baseball for life due to participation in a match-fixing scandal, show up and play their favourite game once more.
“If you build it, they will come”, seems to be the theme around which equity and credit markets have been revolving for much of 2024 and 2025. AI (even in the raw form of Large Language Models) is taking the world by storm. Financiers across the globe and racing to provide capital for the next big project. The US and China are moving at breakneck speed to build the energy infrastructure for data centres, and going all out to win (if there is such a thing) the AI race. The US is more constrained in terms of power production than China, with a projected 19 GW shortfall by 2028, but it still has an edge on chips and technology. Morgan Stanley projects $2.9trillion of Tech-related Capital Expenditure in the US alone, roughly 2.5% of global GDP and three times what the non-tech S&P 500 spends. All of this, for a market that, to this day, generates no more than $16bn in profits. Clearly, the maths don’t work, at least yet. Calling it a traditional “bubble”, however, risks missing the fact that the choice to pursue this is strategic, not financial. The financial system has been co-opted (if not coerced) to this geostrategic and geoeconomic race that, frankly, dwarfs the 1960s space race.
“If you build it (the infrastructure), they (geopolitical and financial gains) will come”.
The world revolves around AI now, whether we like it or not. Our forecasts will, to a large degree, too. The maths may not work, but this isn’t a mathematical problem. It’s, ultimately, one of faith. Western economies are going all-in on the fourth industrial revolution and expecting productivity gains as soon as possible. That the economy will transform, that productivity and profitability will rise, that consumers will still remain strong and that the West (the economy we live in and the assets we invest in) will be the winner in the race.
Economic Forecasts.
No recession, but growth will slow down slightly further than anticipated. Consensus believes that Europe and the UK will grow roughly above 1% and the US around 2%. We believe that growth risks are to the downside. Partly, this is because the world has yet to see the effects of America’s trade war. Yet, as stocks wane and supply chains are slow to adapt, inflation for key items will likely go up, reducing real growth, while disruptions in deliveries will occur. With AI siphoning most of the available capital, non-tech-related industries will likely see slower growth.
Fiscal dominance - Inflation will rise. 2026 is the year when the provisions of the Big Beautiful Bill begin to take effect. Fiscal dominance (fiscal expansion over monetary prudence), is the preferred strategy in the United States, but also in many European states that see low growth, defence challenges and pension systems threatened. In this environment, inflation control becomes a secondary priority. After April, the benefits of $60 oil will likely begin to dissipate (unless oil prices fall significantly below that level, which we don’t see as a likely scenario). Countries may tolerate 3%-4% of inflation and focus on nominal rather than real growth.
But the Fed will cut more than once. We thus believe that the Fed, which is now only projecting one rate cut this year (the market is projecting two), will likely cut more than once. Even more than twice, as political pressures mount, both leading Fed candidates have agreed that the President needs to be consulted on decisions. Having said that, it is not likely that all Fed members will simply fall in line if independence is challenged and the regime changes abruptly. We expect more divisions within the Fed.
Unemployment will keep climbing as AI disrupts industries. Productivity will rise. AI is already disrupting employment across the board, especially among younger workers and consumers. We think that 2026 will likely be a pivotal year for the theme, especially in the services industry and knowledge workers. Productivity will rise, of course, but new work and pricing will be challenged. 2026 may be the year when knowledge becomes commoditised, and clients pay only for insights.
The US will outperform the EU economically (fiscal stimulus, real growth, productivity). The US is using the Dollar’s dominance to fiscally expand faster than Europe. The CHIPS and GENIOUS Act, combined with Europe’s reluctance and regulatory drive, ensured that the US will be the centre of the fourth industrial revolution, and be the first to reap the gains. Despite an increase in defence spending, Europe is also hobbled by internal divisions, difficult politics and an American demand shock from the trade wars.
The dollar will go down further (lower rates, intentional): The US Dollar lost 11% versus international currencies between January and June. Historically, its credibility has survived 40%-50% declines. We believe that the Presidency will succeed in pushing for lower rates than the Fed presently expects, and that the White House will favour renewed Dollar weakness in order to improve exports and increase local manufacturing. With the Renminbi more or less pegged to the USD, the question is whether Europe and the UK will follow the Dollar downward. We believe that the UK can ill-afford to allow for more depreciation, as inflation is already squeezing economic growth. The EU in 2025 opted to use the Euro as a store of value, rather than a competitive tool, and it is likely that it will follow a similar approach in 2026.
AI will slow down due to tech and energy constraints, but not a traditional bubble burst (state). OpenAI will lose ground. Even as consumers and knowledge workers scramble to adapt to the new reality, AI growth is now linear, not exponential. Partly this is because of the non-linear way that tech grows, with leaps rather than just small steps. Partly, it has to do with physical constraints (processing power, availability of data centres, availability of electricity etc. A slowdown, even a market correction, is entirely possible, and up to a point welcome. Financial markets may leap on faith, policy and a good narrative, but they cannot do so steadily without seeing profitability. We believe that OpenAI will lose ground, as other competitors, like Google, begin to assert themselves in the market, and that could sour the narrative somewhat. Ultimately, the industry will survive, like the tech industry survived Yahoo’s retreat two decades ago.
The US will pivot to product trade wars. We believe this for a number of reasons. One, because the US has already struck deals with major allies and has achieved a trade truce with China. Second, legal challenges to the President’s power to unilaterally impose large tariffs are likely to succeed. Third, and most important, because the AI race takes precedence, and physical constraints are as big as they are, the US will need to import raw materials. In the same vein, we expect the US to relax some visa rules to attract more talent.
The White House’s change momentum will slow. Recent electoral losses and the President’s admitting that the party could lose the Midterm elections may put the White House’s legislative efforts on the back foot. An already very thin Republican majority will be hard-pressed to pass expansive bills, like the Big Beautiful Bill.
Geopolitical and geoeconomic disruption to persist. The move from a unipolar to a multipolar world continues unabated. The transition will not be nearly as smooth as the transition from multipolar to unipolar, as it represents fragmentation. Old alliances are broken and being called into question. Politics becomes more transactional. Washington and Beijing's modus of competition is now more about power than promises. Some countries will yield, some will try to unite in different blocks. High Debt Levels and the AI race will add fuel to geoeconomic fragmentation.
We are still positive on China. The world’s second-largest economy has likely fallen into a liquidity trap, stimulating the economy without spurring growth. Capital expenditure is collapsing, especially in the housing sector. Last year we thought the economy would post a modest recovery. While it didn’t, we believe the same for 2026. The country is an equal contender in the AI race, and can create infrastructure much faster than any other major economy to facilitate its ambitions.
Assets we like in this environment
AI-related assets. It is very hard to ignore the geopolitical push behind high valuations. So, despite these and a weak profitability case, we believe that these assets are still important for portfolios.
Non-pure AI plays. But we also believe that investors could, and should, consider diversifying their portfolios to include more than just the Magnificent Seven. We would focus on Energy and energy utilities. Building the physical infrastructure for data centres will be crucial for AI to deliver productivity gains. Despite this being a consensus theme, the valuations for energy utilities are mostly around the low 20s or high 10s, suggesting that there is room for them to expand. We also see room for a rotation to “value”. As the market may likely take a breather from a Magnificent Seven-focused narrative, investors could look at other companies, focusing on producers that may benefit from protectionism and AI, as well as services firms that adapt to the AI revolution.
The steepening trade. Fiscal dominance in the US means favouring rate cuts, even at the expense of higher inflation. This would lower short-term rates (where rate cuts live) and increase longer-term rates (where inflation lives). We would thus maintain a lower duration in portfolios for the time being. While Europe has less of an inflation problem (lower relative growth) and the ECB has more or less finished with rate cuts, we expect the European Yield Curves to be influenced by the developments across the Atlantic.
Inflation-linked bonds. The US’s strategy is one where inflation seems like a secondary concern. Due to global supply chain disruptions and possibly the dissipation of the lower oil effect after April on the inflation numbers, we feel that inflationary pressures could spread even to weaker European economies. Despite their high pricing, we feel that inflation-linked bonds have a place in client portfolios.
Emerging Markets. While we view China as a country that does not prioritise the support of investors, we feel that the whole of Asia will likely benefit from several factors: the AI race (especially Chinese tech companies), the lower Dollar (which will help local economies refinance themselves at lower rates) and reforms (especially in Japan. We would thus be more positive on EM assets in both the equity and the credit/sovereign space.
Assets we like less
Private Assets. The private asset model took a hit after 2022 when interest rates began to climb abruptly. While governments and asset managers are very positive about placing retail wealth in private assets, we think this is a fundamentally bad idea. Private assets valuations may not necessarily exactly reflect reality. According to one report, around 11% of private credit investments are now paid off in IOUs instead of cash. Private vehicles are incentivised to keep investments alive, to avoid write-offs and investor panic. Opaque valuations and low liquidity may be ingredients for aggressive portfolios, but not slow defensive money.
Gold. Gold has climbed significantly in the last year, on fears of excessive debt and Dollar devaluation. However, global debt/GDP actually reduced in Q3 (from 325%to 323%), and the Dollar lost only 11% vs peers, a far cry from gold’s 60% appreciation. We believe the asset to be moved by central bank buying, especially in Asia, where efforts to de-dollarize are more pronounced, so some appreciation is warranted. But its movements later in the year, higher volatility and correlation with equities also suggest a modicum of speculation. It would take a sustained de-correlation with risk assets for us to become more positive on gold.
Some of the Trump Trades. Most of the Trump Trade components will continue to be successful (energy, AI). We would be more conservative with trades that benefit from financial decentralisation. If the White House’s legislative momentum wanes, efforts to deregulate further could be pushed back, and this could have an effect on financials and cryptocurrencies.