Global Perspectives: Investment outlook 2026 (EMEA)

Tom Ross: Hello, everyone, and thank you. Welcome to today’s Live Market GPS Webcast Investment Outlook for 2026. I’m Tom Ross, Head of High Yield and Portfolio Manager on Janus Henderson’s Multi-Sector Credit Team.

Our Janus Henderson purpose is investing in a brighter future together. And as we sit in front of the giant ampersand, we have behind us, I would like to say thank you to all the conversations with clients that we’ve had this year that have really helped shape our view, and hopefully yours as well.

With those conversations in mind, these are the topics that we’ve spoken with many of you already about and believe will inform how we then navigate through 2026.

So today, we’ll discuss the outlook for growth and the K-shaped economy in particular. We’re going to talk about the return of the cost of capital, that has been a key theme for us for a while, and also any key risks to the market as well.

To help answer these questions and more, I’m delighted to be joined by Richard Clode, Portfolio Manager on Technology Equities, Luke Newman, Absolute Return, and Denis Struc, Portfolio Manager on the Securitised Credit Team. Right, everyone, welcome.

So, to start out, outlook for growth and the K-shaped economy. So, headline growth is merely a combination of lots of different bits of economic activities, which currently feel less correlated than probably forever. For simplicity’s sake, let’s split it purely into anything AI-related and everything else. Richard, let’s start with AI. Overhyped, or material growth engine?

Richard Clode: That has been the question for the last few years, and I think will remain the debate into ‘26. I’ve seen an increasing number of strategy pieces and client conversations about whether this is a bubble, whether this technology is overhyped, and where we are in that sort of 90s analogy heading into 2000. And I think for me, there’s some major differences that I think we need to focus on.

One is that if you take the poster child for today’s technology, which is Nvidia, it’s about a quarter of the valuation of Cisco at the peak in 2000. So, I think valuations are in a very different place. I think back in 2000, the kind of the “Build and They Will Come”, let’s build a bunch of fibre and hopefully someone will use the internet at some point, today, if you put in a GPU in the cloud, it’s literally being rented out the next day. So, I think from that sort of monetisation point of view, it’s very different.

And then, I think in terms of use cases, I sense a lot of naysayers around the use cases around AI. And again, I think that’s proliferating fairly quickly. If you think back to DeepSeek earlier this year, the coming out party for reasoning models and cheaper models, and Jevons Paradox, which we talked about at the time, I think this technology is getting in our hands. We just had Gemini 3 come out the other day, and immediately we can use it in every Google service that we use every day.

So, I think those use cases are coming through. The innovation’s coming through. This technology is not standing still. We’ve just got to be a little bit patient. The CapEx goes in first, then the revenues and monetisation comes later. Let’s just have a little bit of patience, and I think we’ll get there. So, I think it’s not overhyped, but that doesn’t mean, as active managers, we don’t need to navigate different narratives, whether it be DeepSeek or Liberation Day or whatever it is. And we don’t need to be dynamic about assessing where expectations are too high, or valuations are too high.

Ross: Yes. Luke, anything to add on that?

Luke Newman: This is another live question in the world of long/short and absolute return, concerned about the question of whether there is a bubble, there is the downside risk. I think we’re alive to the questions around return on investment, how justifiable are these billions of dollars that we can see being deployed? And I think the answer is, so far, they are. So, it’s not something that we’ve been fighting. Indeed, we’ve participated on the long side in a lot of these areas as well.

But we can see the impact on depreciation to earnings. I think we’ll need to see some concrete evidence of the efficiency of that spend going forward. If I’m honest, I think more tangentially, the opportunities that we’re seeing are perhaps the employers of AI. Where are we seeing deployment of that technology? And we’ve seen some evidence in terms of faster revenue, but actually there’s a huge cost opportunity as well. And that will take us into perhaps less glamorous areas of the economy and the market. We can look at financial services or healthcare, where they seem to be gaining some really big advantages through their cost base there.

The other area we’re looking at very hard at the moment are those businesses and sectors that, the perception to date, have been are the losers from AI, particularly in that B2B area, software businesses that have grown and compounded for years. Many of them have been hit very hard through the last couple of years. So, we’re looking again at that area. And I think where you’ve got captive data and real barriers, there could be some real opportunities in what’s become known as the AI loser’s basket. So that’s one area, a step away from the ferocity of the main debate, that we’re seeing some opportunities.

Ross: Now, also, the other side to this as well is obviously how to finance all of this CapEx as well. And this has been a key topic that myself and other members of the team have been speaking to clients about as well. Just to put some figures to it, if we have hyperscaler CapEx next year at something like US$500 billion, could be US$700 billion in 2027, again there’s ranges around that, I think would probably be more towards that optimistic end of those. Now, that’s probably going to mean a lot of debt issuance as well, especially within the investment grade market, because these hyperscalers tend to be financed there.

And it’s going to mean that US investment grade supply is going to be up 25% next year, which is pretty meaningful. The weight of tech within those benchmarks in the US is going to go from 9% to 16%, potentially, from 1% to 8% within the European market. And let’s say we have US$400 billion of issuance next year; this year we’ve had US$1.6 trillion of US treasury net issuance. So, this is not immaterial in terms of global and sovereign debt as well as that as well.

But I think the difference this time, and whilst this is not like the energy issuance crisis, is that, as you say, they’re already getting the returns. In fact, most of these companies could spend this CapEx out of earnings. It’s just that it’s cheaper to do it from a debt perspective, as opposed to this enormous expansion and re-leveraging that we’re seeing within other sectors.

Clode: And I think that’s a really important point. For the four US hyperscalers, this is a choice. And I think the market is slightly ignoring that fact. It’s not a choice for an Oracle, and then it’s not a choice for the neoclouds, it’s not a choice for OpenAI. But that is the big difference, they are choosing to issue debt because there is significant demand for this paper.

Ross: Yes, so, our view is that we’ll probably have a little bit of widening with investment grade spreads, but it’s not some massive crisis. For that, we need to really see a material drop-off in earnings. And again, it’s going to be, one, that’s not our expectation, but also, it’s going to be a long time before we really understand about that.

Denis Struc: Also, look, there is a lot of optimism from the equities market about the development of AI. A lot of expenditure needs to happen. When we look from the fixed income point of view, we are bond investors, our glass is perpetually half-empty, so to say. But there are implications we need to look today. So, we spoke about the spendings. The funding is going to need to come from the bond market, the dislocations on the spread. From the bond investor’s point of view, how do you offset the potential volatility that may come in those spreads? And that’s where ability to differentiate broadly through the sectors is important.

Securitisation, a layer of the market has been picking up interest over the past years, probably will be less impacted in terms of the volatility of the spread. And it’s prudent for the bond investors and the core fixed income allocation, while jumping on that wave of the positivity but also, at the same time, looking if it doesn’t necessarily play out in the way that I’m thinking it’ll play out, where are the layers of the market I can play in?

A couple of other things. I think the AI story within fixed income, there is more direct impact spending to build the data centres and so on, spilling over partially into the securitisation. The funding for the data centres happens in the US, starts to reopen that funding from Europe, much slower, but we’re seeing that impact there.

If you go further down into the corporates, I will pick the word that you mentioned, Luke, deployment of AI is by far going to have the biggest impact, it’s less about the expenditure on all this infrastructure that is around the AI, that primarily sits with the large institutions. The others are going to be how do I readjust my revenues by using this deployment of AI? And there are most certainly going to be winners there, but losers as well.

Ross: Good. Right, so, that’s one part of the growth equation. What about everything else and the rest of the economy? Luke, over to you in terms of that broader part of the economy doesn’t quite have that same optimism as maybe the other side.

Newman: It’s interesting. We’ve split the discussion into AI and everything else, because I think there’s a lot of credence there. If you look at investment trends, it’s not even over the last year, the last two or three years, we’ve seen AI, data centre, power grid upgrades, European defence. And then, I’m sort of running out of investment themes, because everything else has been quite challenged. And there’s some normalisation still from COVID and lockdowns. There’s clearly the challenge of higher financing rates with the cost of money that is providing an investment challenge now. So, I think it has been tough elsewhere.

One of the areas we’ve been most focused on the short side has been the consumer, particularly the US consumer. So, a really challenging period, and it’s a combination of factors. It’s that financing race again, mortgages, student loans, credit cards, making it tougher in terms of discretionary spending, particularly at the lower end. So, the bottom part of that K you mentioned, I think it’s been really, really tough. Consumer staples, food companies, food retailers facing those challenges.

But also, we’ve had other new features of the world that we live in, obesity drugs having a huge impact there on consumer habits. Some of those habits seem to be changing before these drugs got launched. So, there’s some big trend at play there, and it’s proving a headwind to a lot of incumbents within areas of the consumer economy.

I’ve got to say, as I look into next year, we’re starting to see perhaps some signs that that’s improving, a few green shoots. We’re seeing businesses able to reposition themselves, reposition the product set, the business model. I think if we start to step forward, particularly into a down-rate cycle in the US, and you’re the experts here, that could see a bit of a relief, because we’re looking at this area of the public equity market that has de-rated considerably. So that’s where the pressure’s been. I just wonder, stepping into 2026, whether we see a little bit of upside risk in that area.

Ross: And we’ve got things like the One Big Beautiful Bill as well, which again should help at the margin. Again, these are not things that are going to have a massive impact, but that defence spending in Europe can just maybe take us from that poor trajectory to being a little bit more positive.

Newman: I think so. And we can have a debate about the multiplier effect on that, on those big fiscal programmes. History suggests the US multiplier has typically been larger than the one achieved in Europe. But let’s see. There’s some big numbers that have been signed off, proposed and funded within defence and infrastructure in Europe, and that could well filter out into the wider economy.

Ross: Good. And actually, we’ve just had a question through on this as well. Whilst we’re on the K- economy, how long, or how sustainable, is this K-shaped economy? How long can we be in this situation where we have growth within some areas of the market, and much less so within elsewhere? Anyone any thoughts there?

Struc: I think if I was to add, you mentioned two out of three variables in my mind which determine the health of the consumers. You mentioned the high level of rates, that’s the mortgages, that’s the loan. The high levels of inflation, that’s exactly what they’re spending every day. But also, the third variable is what level of unemployment do we see? That is the key. And we actually haven’t seen a perfect storm developing over the past four years, precisely because two out of three variables have played out negatively, but the levels of employment were very high. And we haven’t seen that deteriorate.

So, to answer your point on the K-shaped rate, to me, we will continue to be in the environment for as long as the level of employment stays relatively high. And we haven’t seen deterioration of those numbers substantially. We we’ve seen a pick-up in unemployment in the UK. Not significant. From, what, 4.3% at the beginning of the year, to about 5% currently. It’s going up, but we also starting from very low levels.

For us to break that cycle, where you have significant winners and everyone else, you need to have some kind of more substantial shock. And to me, with the tailwinds that we’re seeing, with the rates decline, with the ease of inflation, one variable can really derail that is the levels of unemployment. And we’re not necessarily seeing it. So, my answer to the question that you had, we can potentially be in quite a prolonged environment like that. Because as long as consumers remain in employment and able to sustain the bills, they may not be particularly happy with the level of wealth they have at this point in time, but it doesn’t necessarily mean that the economy is going to have a substantial reset.

Newman: There’s more policy risk around this, isn’t there?

Struc: Exactly right. I totally agree.

Newman: We’re sat here in London today, there’s been attempts to walk that minimum wage up at the lower end, in terms of lower-end earners. Do we get a push back from employers at that point? Are the costs of incremental employment beginning to get too high? We’re beginning to hear it anecdotally from the private sector, certainly, but beginning to hear similar messages from the public sector. Is that where the shock comes from? We’ve had a lot of experience dealing with policy and policy risk and policy error over the last few years, so that’s very much a live risk as we go into next year.

Clode: And this is where we end up full circle into AI. There’s a lot of concern around AI and the impact on jobs numbers. I think for us, this is very different to, again, a lot of it was blamed, and the impact on politics was blamed on automation and deglobalisation, leading to the blue-collar jobs coming under so much pressure in many countries. This kind of AI revolution is going to impact white collar jobs.

And I think just in terms of the number of jobs, that’s less impactful, I think has less of a political impact, but it is more of a middle-class impact than a lot of those blue-collar voters impacts. And I think, as a result, you’re going to see a different impact politically and economically from this AI wave. And ultimately, it’s something that near-term leads to dislocation, but ultimately, long term, in many developed economies, we need, or even in China, we need, because the working population is shrinking.

Ross: Now, sticking on this in terms of what the central banks do next year, and to that question of how sustainable is the K-shaped economy, obviously, normally in a K shape, it’s the upper end of growth that’s causing the inflation, which then means the central banks aren’t cutting, which could then limit that. Richard, can you just talk a little bit in terms of the inflationary impact of the positive growth we have from AI at the moment?

Clode: Certainly, sitting from our team’s point of view, we often sit in a lot of macro debates and hear a lot of economists, and we always feel that one bit that’s really missing from that input is the impact of technology and how deflationary that has been. And I still think that will be, long term, deflationary in terms of the impact of AI into the economy.

That doesn’t mean that, near-term, you can’t get some hotter areas because you’re driving electricity prices up or construction employee costs or wages. But I still think, longer term, this is going to be a key deflationary technology, and hopefully a productivity boost over time. So hopefully, that can sustain growth longer term without adding that inflationary pressure that has potential for more policy mistakes coming through.

Ross: Yes, which then leads us on to how many cuts can we have next year within the various central banks. But again, I think as we generally see, it’s not surprising at the moment that the market is still pricing in cuts for next year, or potentially even later on this month, from the US Federal Reserve and beyond, even though we might have the high headline figure next year. So, just in terms of those cuts for next year, just for all of the clients out there, anyone want to just talk in terms of their expectations through onto future cuts?

Struc: I think the signalling is there. We’re hearing from the Fed what they want to do. I think what helps as well, inflation is easing off. It’s not at the levels that we have observed before, and no doubt there’s going to be pressure on the rates coming from some other sources, like the administration and so on.

The reality is I think we’re peak rate cycle already. We know that. To me, it’s the question of the timing. How long is it going to take to get rates lower? And the second question to that, is it going to be achieved through a normalised way, meaning we are in the type of the economy we are today, and we will allow ourselves a gradual reduction in rates? Or are we going to be facing a significant shock of some sort, where those rates are going to decline substantially, and will decline in one move very fast? Not necessarily seeing that former scenario. It’s just it just doesn’t materialise there.

The big question fixed income investors are asking themselves, how do I position the portfolio when I do expect the rates to decline but, equally, there is substantial amount of volatility still to be seen from the path of that decline? And there is no straightforward answer. I think diversity of view in the portfolio is the key.

If you look at the curve where the rates are priced in today, there is very little upside, not significant upside between the short term of the rate of the curve and the longer term. So, a two to ten year, there’s 50 basis points of the differential between the two points on the curve on the ten-year. If you really have a bullish view on the rates, you really need to go long. But at 50 basis points, you’re not really getting that substantial pick-up for that.

And that’s why our view is saying, look, it’s important to have a diversified view in the portfolio. It’s important to recognise that we are in an environment that will see rates declining, but because we don’t know what the speed is, and that can differ, diversify the portfolio in the short-term holdings of the rates too, as well as long. And this is where fixed income is offering those possibilities. You have floating rate products like CLO, like securitised market, that most certainly have a part in the core fixed income allocation in the environment like we are likely to see over the next year.

Ross: Great. Yes, so, I guess just for our viewers, the view is that, say, we might have a cut from the Fed later this year. If we don’t have it in December, there’s a good chance we’ll probably have one in January or February. Maybe it’s three or so before the end of next year. ECB, probably no cuts priced in, maybe just a little bit elsewhere within, say, the Bank of England.

But I think ultimately, let’s say the other part of the economy, the ex-AI bit, if we do have a downturn there, I think there’s still ability for those central banks to cut even more aggressively than that. That’s not our expectation, because I think we’re probably a little bit more optimistic. But let’s say we’re wrong on that, again, I think the central banks still have a little bit of room.

Struc: We certainly have much more room to the policy today than we had, say, three years ago, four years ago. When the rates were at zero, you can’t really go negative without hurting the real economy. We are in a different place now, so we’ll most certainly set ourselves to whatever the situation may evolve over the next year.

Clode: And that’s where parallels, again, to 2000 break down. That was a policy mistake and a tightening that led to the conditions that led to that bubble bursting. It’s very hard to have a bubble bursting if you’re having loosening conditions out there. So, I still feel, if you think about back to the 90s analogy, it would be a bit more a 96 than a 99. This has got room to run a hell of a lot hotter before we maybe have a potential tightening or a policy mistake.

Ross: Great, thank you. So, the return of the cost of capital. Now, this is obviously a theme that Janus Henderson has spoken about for a handful of years now, but I think it’s still important in terms of that investor behaviour. So, from a fixed income perspective, Denis, in terms of that high cost of capital, how do you believe that has changed investor behaviour, certainly in the conversations that you’ve had with clients?

Struc: Well, look, there’s no secret, everybody likes high levels of yield. That’s very obvious. No more obvious than floating rate products. You’ve seen the rates rising from 2022. You’re floating rate investor, you’ve gone all the way up, and you face no risk of duration in the portfolio. That was wonderful. That theme is still there. Because higher level of income is your first defence against volatility. You may experience volatility, but if you have consistent level of income coming in the portfolio for the payments of the investments, that’s what helping to limit that impact of the volatility.

We’ve seen that this year. Liberation Day was a good example of that. If you had higher yielding assets in the portfolio in stable, safer sorts of offsets, you would have done very well for that month and recovered post that point of volatility.

Now, on points of income, let’s not forget that that high level of yield is having somewhat negative impact on the borrowers, not just consumers, but from the corporate side. The cost of funding is higher, and that’s certainly allowed the diversification of risk. In the past, when the cost of funding is really low, everybody’s benefiting from the funding, and that’s why there’s not substantial amount of pressure on the corporates to deliver on the revenue and make sure that they can sustain those levels of borrowing and the levels of interest rates that they need to pay.

Over the past two years, and you probably seen that in the high yield space as well, we’ve seen significantly higher number of laggards. You’re seeing dispersion. Why that matters? Because if the company defaults, it doesn’t generate income on the bond that you have. So that’s why it’s important to be very careful about the specific idiosyncratic risks. And I think idiosyncratic is a lot more frequently heard word of the past 12 months, and most certainly will be the theme to be heard over the next year or so.

Ross: Now, just carrying on with that, in terms of what does it mean for companies. And obviously we’ve spoken lots more recently because rates obviously impacts the equity market, but that correlation seems to be probably more important than ever, I guess, as those that return of cost of capital has come back.

Newman: I think so. In terms of correlation between equity and fixed income at key moments, that is something that we have seen. And I think it’s intuitive, given the persistent levels of inflation we’ve seen, back in a positive rate cycle. It probably argues for investors to look at their portfolios in terms of the use of alternatives, in terms of generally uncorrelated diversifying assets.

And I would say that as an absolute return manager, but I think it’s we’ve seen, particularly in the last three, three and a half years, just the ability not only to protect but actually to capitalise from some of the periods of distress in equity and fixed income markets we’ve seen, and you mentioned the tariff introduction, the DOGE initiatives, areas where diversifying alternative return funds were able to protect on the downside, and I’m confident that should continue going forward.

But Denis gave a great explanation, though, of the return of dispersion in the real-world context. I think there’s also a technical element to this. Why, as active stock pickers, have we generally got a smile on our face now, and it feels that effort in equals productive output out? Because we’ve moved from an environment where the discount rate was zero, and we had huge correlation intra-asset class, it felt like the world was growth and value, and that was the end of the analysis. But now, in addition to real world impacts of financing rates and active decisions that management teams need to make, we’ve also seen the return of valuation as a factor.

So, our ability now is to identify an undervalued business with positive surprise, or conversely an overvalued business with some challenges ahead that are not priced in, that gives the tool kit to active equity stock pickers, I think, to be able to not only generate higher returns, but more consistent returns. And it really is a world away from that protracted period of the QE years, where the cost of money was zero, near zero or subzero.

Clode: And I think market participants haven’t really adjusted to the new world, the return of the cost of capital. Many of them are still using a playbook from, because they had ten years plus of it, where  money was free. And so, whether that be when you’re thinking about where rates are going versus your safe or your risk on books, the fact that telcos or utilities are incredibly leveraged kind of broke down in ‘22 and into ‘23. And it’s the same now.

And then, on the other hand, you’ve seen in the last month or two, the fact that we sort of repriced a December cut, it had unprofitable tech down over 30%, but everyone had piled into that again, because we were going to get rate cuts. Yes, we’re going to get rate cuts, but they’re not going to go to zero, and we’re not going to get 2020 again. So I do think having a bit of experience, a bit of grey hair or whatever it is, actually having managed through kind of rates at 3% to 5%, we’re much more comfortable in this environment and stock dispersion and being able to generate some alpha than maybe some others.

Ross: Good. Okay, so, it feels like our base case is that the cycle is far from over, certainly for the time being. So what are we watching out for in terms of the key risks or the challenge to that view? I’ll open that to everyone.

Newman: I think, as Denis said, employment is going to be a really interesting indicator to watch. We’ve muddled through, as economies, with some of the discrepancies we’ve talked about now, but we’re starting to see, and it’s easier to track in the public world rather than private, we’re starting to see larger and larger headcount reductions being put through.

Without going around in circles now, we know we’re going to start to see different deployments, not just of AI. We talked about the cost opportunity, what’s the implication in terms of human capital, but in manufacturing and industrial units, with robotics and mechanised processes, again, starting to come through, does that start to build not only at a micro level, in terms of employment, but then what that means at a macro level?

And is that the building block for this sticky inflation that we’ve seen over the last three or four years, just beginning to ever away again, and giving the green light to the to the central bankers? So that’s the macro indicator we’re watching the closest. And then, we’ll speak to numerous management teams a week, and it’s generally the first question we’re asking at the moment, because I think it’s going to become crucial.

Struc: Well, if I was to add, from the fixed income side, I mentioned before our glass is perpetually half-empty, I’m risking here to be actually positive. Let me explain. We’re in the long cycle, and the biggest risk, I think, for the fixed income allocations, how defensive do you go? Because if you are defensive and you’re too early, you’re going to be missing on those higher levels of income and higher levels of yield. That’s where I think the biggest risk at the moment is to be sort of underestimating for how long that cycle can last. It’s not secret, fixed income assets broadly are quite expensive in terms of spread.

Fund managers in active fund management form need to work harder for us, including to make sure that we’re making the right allocations to the broadest asset type, to make sure that clients get good access to that level of income, that level of yield, and we’re not going to defensive too soon. To balance that view, it’s quite a positive, carry on with those investments, do it in a very diversified way, but at the same time, those idiosyncratic risks that I pointed out, that’s what can blow up the return for the year, as well as increase the volatility.

So, making sure that you stay invested, well diversified, so you don’t face that underperformance for being defensive too soon, but do it in a disciplined way, because there are stories evolving there. And more certainly, there are factors that we’ve discussed, either changing on the revenue streams from all levels of employment, from factors like AI or others. You will get those idiosyncratic stories developing.

If I was to bring an example, loans market is a good barometer to look at, especially when you look at CLOs. It’s performing quite well, the nominal defaults are quite low. But if you look underneath, 50%, 60% of the market is trading above par. But you also got about 13.5% of loans marking trading at distressed levels. They are not defaulted, but there are some indicators where the investors are pricing some dislocation.

So, all I’m saying is remain invested, otherwise there is a possibility of underperformance, which is going to hurt the clients as well as the managers, but do it in the prudent way where those landmines are not stepped on throughout the year.

Clode: And from my side, we just had a very healthy wall of worry. We’re at the three-year anniversary of ChatGPT, and just the entire time this AI CapEx isn’t sustainable, we will never be able to monetise it, blahdy-blahdy-blah. And that’s good. What worries me is when everyone goes, yes, this is just game on, we’re not going to worry about this, let’s put Nvidia on 100 times earnings. That’s when we’re going to have a bubble.

So, I did feel a little bit in the summer we started underpinning OpenAI, committing to US$1.4 trillion, and we’re going have US$3 trillion to US$4 trillion of infrastructure spending by 2030, and we started slightly dreaming the dream, and that rapidly got the brakes put on it. But that’s a good thing. I think it’s very hard to have a bubble if everyone is talking and worrying about the fact that we’re in a bubble. It’s just almost impossible for it to happen as a result.

Ross: Yes. And just to touch on that idiosyncratic point as well, because obviously, looking at high yield as being one of the SFR, the names that have gone through that liability management exercise, again, it’s normally your cyclicals that get in trouble, but this time it’s not. It’s actually more mature businesses that became over levered because they got addicted to the low rates, etc. And obviously, many of the conversations that I have with clients has involved the word cockroach, and whether they’re any more cockroaches out there. In terms of our view, we will find more cockroaches if the other part of that economy continues to go down. And, absolutely, defaults are absolutely going to rise there.

But, again, if you take something like a First Brands or something, I don’t believe there are any more cockroaches when First Brands happen from before relative to after. It was fraud. It was an over-levered company. I don’t necessarily believe that means, in and of itself, that there are more there. Will we see the odd default come through and potentially in other areas of the market? Absolutely, of course, as we go longer into the cycle.

But, again, that’s why that growth point is so important, because that’s when suddenly we then really need to worry about those default rates going up. Without that, and with the more optimistic view, actually, I’d say we probably won’t hear about a huge number of cockroaches from that perspective. Okay, so that’s the risks we’re worried about. Which risks are we less concerned about? You mentioned before about those lazy narratives that have come through in the market.

Clode: Exactly. And we have a lot of kind of knee-jerk reactions. I remember back in, it was only in January when everyone said sell all your AI semis and buy software, that’s the obvious thing to do, because we’re not going to need any CapEx again. And that would have been disastrous to do, and that was only ten months ago. And I think people forget, they take a lot of these announcements, particularly in AI, at face value. And, yes, it can get out of hand and circular financing, and I think some of those concerns are valid, particularly for some of the companies. And again, that’s where we can pick and choose between companies we’re more comfortable with and who can afford this, and companies that can’t.

But there’s a natural break to this, which is the semiconductors. A lot of people talk about semiconductors, but I think very few people truly understand what’s happened in the last few years, which is that basically, in the last three years of AI taking off, Nvidia and everything, effectively we had a huge overbuild of capacity in the industry because of pandemic and this pull-forward demand. And then, we were all going to have an AI phone and an AI PC, and we kind of didn’t. And that’s the vast majority of semiconductor industry capacity, and so that excess capacity was just soaked up by this AI demand.

And now, we’re at this quite important inflection point where we’ve effectively used all that up, and now the industry, and effectively four players, so we got Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung and SK Hynix and Micron, they’ve got to decide to what degree are we going to underpin Sam Altman and all these guys in the next three to four years? And if we build a fab today, it will be ready in three years’ time. And they’re asking us, and they’re coming out with these, I think, deliberately quite ambitious targets to kind of encourage these companies to build. But these companies are only just deciding to make those decisions now.

So there’s, I think, a natural break to, I think, a lot of these kind of forecasts that are taken as read because someone’s announced a 10 gigawatt deal with that one, if we add them all up, we’re going to get to this number. I think we have to be a bit more sanguine about it. And these companies have been around for 40 years. They’ve been through every technology wave. They’ve been through cycles, they’ve been through macro, they’ve been through a global financial crisis (GFC). They’re not going to just sign up to any number that they’re given, and I think that will provide a little bit, we’ve kind of talked about being the adults in the room, that will take a little bit of this overexuberance and maybe just keep it a bit more conservative.

Newman: I was going to ask, why have you seen that cynicism? It’s the part of the value chain that looks strange. But maybe it is an opportunity.

Clode: You’ve got to remember, a company like Micron was losing US$6 billion in 2023, literally two years ago. They’re coming off generationally bad underutilisation and losses because of that overbuild. And exactly the same customers that were telling them that this is going to be amazing literally cut their orders just two or three years ago. So, these people are very reluctant. We’ve heard this one before, let’s just be really clear that this is going to happen or we’re not going to do it.

Newman: And there’s probably a parallel to that other growth industry defence that we talked about in Europe, where this feels generational. I’ve certainly never in my career seen growth rates outside of the US along these lines, but there’s a bit of an air pocket, there’s a bit of hiatus. The funding is in place, the narrative somewhat changes by the day, but the commitment is there. But obviously, we need to see the orders. And I say we as investors. That’s an area that’s rerated, reflecting the opportunity that’s to come.

But I think the market is at the point now where it needs to see, similar to the fab and equipment, semi equipment players, they need to see prepayments, orders coming through to commit to that capacity in the same way. So, we will need to watch those drivers of the growth that we’ve had, but everything we’re hearing, on both fronts, is quite positive still. And it certainly has been enough to offset the question marks on the lower end.

Ross: And one from me, and the one that I’ve spoken to many clients about and always gets brought up. We said before about where valuations are within fixed income or where spreads are, it’s just that view that valuations are tight. And I think there’s just this inane sort of human fear that, well, if spreads are tight, that means they can only, or if they’re at tight levels, they can only go wider from here. It’s like, well, of course they can go wider. But actually, the most likely outcome, when you look statistically, is actually that spreads continue to stay tight for a long period of time.

And back to your point earlier on as well, that’s why still being invested at that stage, again, until we see the real growth downturn, I think spreads probably can stay tight for some time. So if we’re in a view that the cycle continues and that we keep a little bit of risk on, how do we protect against an adverse scenario, one we might be expecting, maybe that growth outlook is not so great, or something we’re not expecting yet? And what can investors do to best manage through this type of environment?

Newman: From my perspective, it’s that short book, so the return of a tool kit to be able to protect on the downside. And it really goes back again to the more rational environment that we’re in, that return of valuation as a factor again, where I think active analysis with tight risk management can protect against the uncertainties.

And there are some known unknowns as we move into next year, but actually, this year has shown, again, that a lot of prompts for sell-offs across all capital markets will come out of left field. So, I think the ability to spread risk effectively, to Denis’s point, in a different asset class, still becomes a very effective tool. And more effective, I would say, with that return of the cost of capital, the money having a cost, return of valuation as a factor, this is the best environment for a decade for alternatives such as equity, long-short. So, the ability within a portfolio to have that shock absorber, I think, to my eyes, is clearer than ever.

Struc: It is interesting, though, because for strategists who don’t necessarily have ability to go short, within the fixed income, may be long-only there, I already mentioned, I’ll probably mention it again, maximising the level of spread in the portfolio is really the key. That gives you protection in the form of income against volatility, against dislocations that recover. That is the backbone of what’s going to take successful deployment of fixed income investment for the next year.

Now, a couple of things, just to bring it all together. Diversify. Duration, momentum is there, but very much places for short rates in the portfolio still, because the volatility may be there. Diversify, stay with the idiosyncratic risks where you’re fully understanding them from the fundamental point of view. As your high yield picks, long picks, but diversify to the asset classes which have less exposure to idiosyncratic, diversified in the portfolios there. And securitised asset is exactly that. They give you that safety from the structural features and everything else. Constructing, that’s what I meant by making your fund managers working harder. Go broad and understand where those risks are.

Ross: Absolutely. And then, I’ll just chip in there as well, because, obviously, what we did well within some of the multi-sector strategies earlier on this year, is had that overweight to securitised when spreads are tight, then you have the volatility of Liberation Day, and then you can move into the more convex asset classes, i.e. with more upside. Areas like investment grade, areas like high yield.

Exactly right, yes.

Take the upside. And then, when it gets tight again, then move back into securitised, better spread for unit volatility.

Newman: And I was going to say, Richard, within your space, where the thematic is just so strong, how do you think about valuation? Me saying valuation as a factor is back, I think I can prove it. How do you go around assessing?

Clode: I was going to say you’ve mentioned it a couple of times, I was going to lead off the valuation discipline side. We’re not in 2020 anymore, we’re not just buying anything to do with AI. And I think we’ve seen that play out very nicely in the last few years. Every company comes in and tells you they’re going to be an AI winner. And we remember this from 20, 25 years ago, where every high street retailer came into the office and said, I’m a winner, a beneficiary of the Internet, and we’re going to do fantastically well out of that. And not only were you not a winner from that, you actually got completely disrupted and a loser.

So, the key defence here is having some valuation discipline, not overpaying, being very wary about unprofitable companies. And the key always in our sector, the reason why it’s so exciting is not just because we’ve got innovative technologies and AI, but they’re companies are going to earn materially more money than the market currently expects. Not 10% more, ten times more.

And if they’re going to earn ten times more money on the valuation side, they’re ten times cheaper than the market currently expects. And so, that’s the way we tend to solve for the valuation challenge of investing in more exciting areas. But I think there’s still a group of investors and market participants that are still playing to this playbook from 2000 and post-GFC and QE and zero interest rates, where they correlate innovation with not making any money, ever. And I just think we’ve moved into a different world where that’s a very dangerous place to be investing. That’s going to be very volatile, and that’s going to lead to a lot of potential drawdowns.

Ross: Great. Well, look, thank you. Thank you to all the question. We’ve actually managed to answer most of them throughout, managed to weave them into questions we had already. If there are any more questions from any clients, please feel free to get in touch with your sales representatives.

But that leaves me to say, Luke, Richard, Denis, thank you for your insights. As always, there are risks to consider, but I think our view remains that the cycle certainly isn’t over yet. But with valuations at current levels, investors should really be demanding their portfolios work harder for them.

I think that’s one key point. Either maximising income per unit of volatility, which is what we mentioned, the alpha, using alpha in order to try and benefit from that, so those shorts, as well as the longs, or maybe it’s simply just investing where growth is prominent. I love the idea of ten times versus 10%. Anyway, thank you also to all of our audience for joining, and we hope today’s discussion helps inform how you think about navigating through 2026 and beyond.