Related content

Ronnie (00:00)
Hey, everybody. Welcome back to the Barclays Brief.
It's Ronnie. It's Monday, September 28th, and I'm so excited to have back on the pod. Just to remind everybody, Ajay is our Global Chairman of Research, and he drives our macro research and strategy effort. And I think the last time we did this together, in fact, I know it was right after the Iran conflict kicked off. In hindsight, we did a pretty good job of seeing signal through noise in that moment. We find ourselves in another moment in time. In my view, that requires just that.

The current macro backdrop leaves us with a lot of risk factors to grapple with. Bond yields are higher. Central banks are tightening again. Oil prices remain elevated. And yet the global economy keeps surprising to the upside. And as I walked up to the studio from my desk, I saw the Nasdaq up about 15% on the year so far. So welcome back. A lot to unpack for our listeners. 2026 has been quite an environment, quite a market cycle. We've had a lot to grapple with. You just recently published your latest quarterly Global Outlook. I love the title Reluctantly Optimistic. Can you walk us through your intent with that title and the views that drove it, please?

Ajay (01:11)
Sure. And it's always good to be back here on you. This is one of my favourite podcasts, and not just because you guys have me on.
So, the point of the title is that the headlines have, like you said, in relentlessly negative, the bond yield moves the move that is most visible. But you're right. Central banks have pivoted from holding to tightening without Iran. You at some point would start to deflate. It shows no signs of doing that or it is back by $100.

But underneath that surface, the three things that have driven the global economy the US economy three months ago, six months ago, nine months ago are the same things that are driving it now with remarkable consistency. And yes, they are all U.S. centric, but they are all pertinent. One is the strength and intensity of the AI CapEx cycle. The second is the strength of US corporate earnings, which are spectacular. And the third is the resilience of the U.S. consumer. I don't especially want to be optimistic. It would be easier to go doom and gloom. I look at the numbers, and I can't help but be that's where the title came from.

Ronnie (02:30)
Right. Well, I love the title. Let's dig into a little more of this deterioration and the macro backdrop. Why? And more importantly, why they haven't translated into much weaker growth. You've done a lot of work on this. Why don't you tell our listeners about why they haven't translated?

Ajay (02:43)
Right. So, this is a great question. Usually, Ronnie, there is a self-correcting mechanism built in between interest rates and the US economy.
Interest rates go up beyond the point the cyclical rate sensitive parts of the US economy, most importantly housing, start to react. As a result, there is weakness in the economy that propagates outside of housing to other sectors. The interest rate market takes a look at that and starts to slow down on any sell-off. You know, that's the self-correcting mechanism.

Now look at what has happened in this cycle. Housing has been in the dumps for the last five years. So, it's ability to cause more damage to the US economy because, you know, everyone goes up and jumps up and down about mortgage rates being where they are. They were at 6.5% in the first half of 2022. We went from 3 to 6 and a half, and then basically a bounce between six and a half to seven and a half for the last five years.

So, housing's ability to do more damage is limited, and it has been replaced running by what seems like a very rate insensitive AI investment cycle. A Google, a Meta. Yes, they are doing debt financing. They are spending an enormous amount of money, but they are not going to pull back on that financing because they say, look, the full 10 year went from 4% to 5% when they did not blink right when high bandwidth memory prices tripled in the last 18 months, they are not pulling back. And if they're not pulling back, the US economy is responding less to the rate selloff, less to central bank tightening than before.

Ronnie (04:13)
It's amazing how focused we've been on 25 basis points, 50 basis points. And then they come in to do these massive financings and they're much less price insensitive than anyone's been in the financing markets, in the bond markets in recent memory.
It's just a reminder. They obviously feel like we've spoken about this AI impulse. They're sitting on something huge and they just want to get it built out. And they're not overly sensitive to 50 or 100 basis points in the current financing.

Ajay (04:38)
And, you know, if I may jump in on you, the there's a there's a nuanced here.
We saw a sign of it in the last numbers. So, Google's earnings call, for example, they went out of their way to say that their third quarters margins would compress because they would have to rent third party compute because they did not have enough to meet existing client demand. Forget the individual company, you know, take a step back. I can't think of something more macro for those who, you know, more bullish on the macro side, for those who are worried that, look, demand for compute is going to at some point start to fall behind supply, it's not happening.

Ronnie (05:10)
Right. And I think the point you're making, and this is something that we're imploring our teams to really see through, is that a lot of the historically held adages around markets just don't seem to apply to this current market environment for some reason. And so, we just need to be very open minded around how much the world has changed. But let's take this into AI and the tangible breakthroughs that we're seeing at this point in the cycle. Meta Muse. Huge deal. I mean, at least in the sense of consumer adoption. Do you think we just had our next major AI breakthrough moment?

Ajay (05:42)
I think we've had a number of these. So, like you said, the big tech breakthroughs, whether it be ad matching by Meta or Google, you know, where they are at, very quietly talking about how there are matching numbers that are efficiencies are going up sharply because of AI or something more public like Meta Muse is the catalyst. But even in industries that people don't pay enough attention to life sciences, for example. You're starting to see AI make remarkable progress. You see it in the earnings numbers running this quarter. Earnings are up 30% annualized and the revenue numbers are up 13%. That is operational leverage kicking in on a very strong scale. And that has to be at some level at driven.

Ronnie (06:23)
So, look I want to get your opinion on this. And I'm still sort of working through it, but it's pretty amazing to me that this many people are willing, with all the sandbox issues and agents, swarm issues and things that you read about in the press, the fact that anecdotally, this many people on the consumer side are willing to give Meta or Instinct AI access to their entire life, all their websites, all their passwords, all their bank accounts, all their credit cards.

I think that says something. And again, like, I'm still working through it. But a lot of the concerns around the risks on AI when you look at the behaviour, people are voting with their decisions in a way that makes you feel like they view the risks as being minimal versus the rewards for them and engaging with this technology. And anyway, I don't know if you have a view on that, but it's just something that really struck me over the weekend.

Ajay (07:11)
No, I think you're correct. Now, maybe that's blind faith, but so far, I think part of it is that the trust comes from the relationship with the hyperscalers. This is a relationship that has been in place for 20 years. You know, these are not new companies. These are not startup telcos. They are the biggest profit generation machines in the history of capitalism. Who are, you know, spending money hand over fist. And so, I think you are right. I think that trust might shake if there is a real incident. But that is true of the banking sector also. You know, if there is a big cyber-attack on a bank that succeeds, but until there isn't, we are a relatively high trust society. I don't think that goes away. It does raise questions about whether that translates to the US being open to Chinese open-source models, things of that nature. And there I think that trust is not going to last very much.

Ronnie (07:59)
So, let's move to this profit cycle. You called it stellar. There's a lot of operating leverage out there. How important is this earnings story to your broader investment view at this point?

Ajay (08:08)
Extremely important for a few reasons. One is because it shows that there is more AI diffusion than people realize that it's showing up in operating leverage across a host of industries. Number two, it emphasizes that the earnings picture is not limited to big tech. The rest of tech, for example, has done much better this all of 2026 than big tech. Financials were the second-best performing sector in the index in terms of, you know, being additive to earnings energy. Yes, you can argue that it was a one off because of the US around windfall.

But eight out of ten SNP sectors are up for the year. This is an earnings story that is not just holding in place. I would argue it is both accelerating and broadening over a three-year period run. You're going to have the single best three-year performance on earnings that you have coming out of a non-recessionary year in many, many decades. It's very hard to see the US economy slowing down.

Ronnie (09:09)
Okay. So, the three key pillars that you outlined AI investment, US corporate earnings, the US consumer, we need these to continue doing what they're doing for the market to continue to act well. How do you feel about these persisting into 2027.

Ajay (09:21)
Pretty good. Yeah, I think take the labour market for the consumer for example. So, the labour market is very slowly tightening. At the margin. The underemployment rate has fallen a whole percentage point over the last year if there was ever a period. Look we all have recency bias running. But remember last April, you and I were more scared last April than at any point in 2026. The equity markets pulled back 20%. If there was ever a point for the US consumer to throw up their hands and say, look, I'm going to start saving, you know, enough is enough. It was last summer and it didn't happen then. It's not going to happen. You know, now they're going to keep on spending. The August retail sales numbers, for example, where, you know, extremely strong the AI cycle. I look enough said in this entire podcast, but it is still intensifying in intensity. You look at all of the hyperscale earnings calls and the sentiment expressed is the same.

They all say, guys, we know that you are shareholders are upset about how much you are spending. But believe you me, not a single dollar of this is speculative. We are simply trying to keep up with client demand. You know, repeatedly they could all be collectively lying. I don't think so. And then finally, the profit cycle, it will slow down. You can't grow at 30%. There were a bunch of one off, but you are still going to have a very, very healthy profit cycle in 2027. I don't see any of these things learned now.

Ronnie (10:40)
Okay, so let's end on the risks. Let's end on the reluctant side of your quarterly narrative. If we're sitting here in six months and markets are lower, not higher, and the continuation of these risks gets worse on the bond market, and where would we have gotten it wrong?

Ajay (10:56)
Bonds. I'm far less worried about oil, I think the worst is past, even if there is no solution immediately. You know, the oil market took its shot at taking down the world economy failed across 2026, second and third quarters. But the bond market worries me. Across Western economies, the US, the UK, France and Japan, lots of outstanding debt in many countries, deficits rising at a faster pace than nominal GDP and zero political will anywhere across political systems to do anything about it.

So the French second round elections next year, for example. I can imagine that being a possible catalyst if you have the far left versus the far right, both sides want to spend. But absent something bad, like a bond crisis in Western economies. And I'll remind you; we haven't really seen a bond crisis except for LDI. And there the system bent in the UK. I've seen something like that. I still think you are supposed to own risk here, you know, famous last words. But that's what I would stand.

Ronnie (11:57)
It's hard to disagree with you, especially when you frame it the way that you did. Great to have you here. We always love having you on the pod. Thank you for your great insights.

Ajay (12:06)
Thanks, Ronnie. And look, I got to tell you, I'm happy we are doing this Barclays Brief forecast right now. It is such a great way to get our views out to a broad audience of listeners. Very, very glad you had me on again.

Ronnie (12:19)
Well, thank you for being here. It's people like you that make it possible.

To summarise, there are a lot of negative headlines out there. But despite these negative headlines, Asia's constructive view on markets is predicated on the AI investment cycle, the strength in US corporate earnings and the strength of the US consumer, all of which he expects to continue for the foreseeable future. There's no doubt we'll be exploring these topics in subsequent episodes of The Barclays Brief.

Please remember to hit subscribe wherever you listen to your podcasts to be notified when new episodes of the brief come out.