Introduction
The global economy has proved more resilient than many expected, but the investment landscape of 2027 looks materially different from a year ago – shaped by conflict in the Middle East, a reversal in interest rate expectations, and an AI-driven capital expenditure (capex) boom of unprecedented scale. As usual, we have also updated our capital-market assumptions, covering expected returns and volatilities for 23 asset classes.
The past year has seen a resilient global economy, despite significant uncertainty and headwinds arising from the geopolitical backdrop. Disruption in the Middle East, resulting from the US-led conflict with Iran which started in the first quarter, led to a spike in energy prices, with Brent crude almost doubling from pre-conflict levels before falling back on hopes for a cessation of hostilities and a reopening of the Strait of Hormuz. At present, it is not clear that President Trump will be able to extricate the US from the current conflict in the Middle East without ceding some element of control over the Strait to Iran, though the situation remains fluid and the range of outcomes is wide. A prolonged conflict would have a lasting impact on energy security and supply, but would also represent a source of future instability, with potential implications for other regions. This unstable backdrop has pushed up inflation at the margin and has contributed to a turn in interest-rate expectations. Indeed, there has been a marked shift in the interest-rate outlook compared with a year ago, when the market was pricing in up to 1% of rate cuts from the US Federal Reserve and anticipating cuts from other central banks. The European Central Bank has, in fact, hiked interest rates earlier this year and markets are now pricing in a greater likelihood of rises in interest rates from major central banks than cuts.
Het conflict tussen de Verenigde Staten (VS), Israël en Iran zorgde eerder dit jaar voor onrust op de energiemarkten. De olieprijs steeg door zorgen over mogelijke verstoringen van de Mondiale energievoorziening en de strategische rol van de Straat van Hormuz. Hoewel markten later deels herstelden, blijft het geopolitieke risico aanwezig. De hogere energieprijzen hebben de inflatiedruk verhoogd en de verwachtingen voor het monetaire beleid veranderd.
While geopolitical events have created uncertainty and volatility, global equity markets have risen to new highs, and credit spreads have mostly remained tight. Geographically, US ‘exceptionalism’ has waned, in line with our view that regional equity returns would broaden and Asian emerging market (EM) equities have been the standout performers over the past year, alongside commodities.
Aside from events in the Middle East, the dominant investment theme, however, has been that of infrastructure expenditure related to AI. The scale of planned capex is unprecedented but the lack of compute capacity is a key issue for ‘hyperscalers’ – large technology companies that offer cloud and AI infrastructure worldwide and operate large data centres for this purpose.
These hyperscalers are seeking to address the lack of compute capacity through spending on data centres, chips, networking equipment and power generation, among other areas. This trend has led to spectacular returns from many semiconductor stocks, including in Asia, and related beneficiaries of the AI capex theme. The AI theme has also resulted in increased bifurcation within the technology sector, with sectors such as software suffering from concern over disruption to existing business models and an erosion of incumbents’ competitive positions.
While AI has the potential to drive productivity gains in the wider economy, the benefits seem set to accrue to a minority of companies and individuals. This is one reason concentration risk in markets remains historically high, with the top 10 companies in the MSCI World index now representing over a quarter of total market capitalisation. AI will also create significant political and economic challenges, and, from a market perspective, there is growing scrutiny over the likely returns which will accrue from capex spending from hyperscalers. The market, thus far, has assumed that the trillions of dollars which are being spent on AI infrastructure, which are increasingly being financed by debt, will prove profitable. Should this perspective change, investors will be unwilling to fund such investments, capex will slow and the recent winners (the companies providing the ‘picks and shovels’ in the AI arms race) will see their order pipelines dry up.
So, while we are constructive on the benefits of AI to drive productivity gains, technological advances often result in a build-out of excess capacity. There is no sign at present of a slowdown in AI capex, and this is driving extraordinary earnings growth in the market which, in turn, is supporting stock valuations. We are watchful for a change in dynamics which are driving both earnings and market returns but are yet to see a turn in fundamental drivers and an end to the capex boom.
Our Capital Market Assumptions (CMA) show, in general, modestly positive return opportunities across asset classes. High grade credit is still expected to deliver a small premium over returns available from government bonds, reflecting historically tight credit spreads, while equity markets will likely deliver premium returns over corporate debt. Local currency EM debt is viewed as attractive within spread products, when considering the available return per unit of risk. Across most asset classes, risk premia are low and valuations are historically high, but EM equities continue to offer opportunities, in our view. Despite impressive performance from this area over the past year there is still a valuation discount to developed markets although the correlation between emerging and developed equities has risen, in part due to the preponderance of the AI theme within global equities.
Elsewhere, our headline expected return from commodities suggests an excellent opportunity for investors here. Nonetheless, this perspective is caveated by a high dependency on commodity-driven inflation and is also tied to the geopolitical outlook. A safer investment proposition, with materially lower volatility, rests with absolute return alternatives, including catastrophe bonds, and direct lending, both of which are likely to deliver attractive returns per unit of risk.
Amid all the usual uncertainty, we retain a focus on the long-term opportunities stemming from the wider economic and corporate environment, as well as from rapid technological disruption. We continue to focus on the judicious construction of portfolios for our clients, diversifying exposure across a wide range of opportunities and ensuring that exposure is aligned to your specific objectives. Balancing risks against the numerous investment opportunities which exist requires structure, diligence and patience.
Interested in learning more?
Download the full 2027 outlook for detailed analysis of the macroeconomic environment, regional equity and fixed income markets, our key investment themes, and our full CMAs covering expected returns and volatilities across 23 asset classes.
