Whilst the peace that was hoped for in the Middle East did not continue during the third quarter, the dominant theme that developed was around the strong demand for capital or as we put it the Competition for Capital. There were three main factors that made this strong demand for capital important for markets.
- The generationally large capital expenditure boom around AI, digitalisation, defence, onshoring and the electrification of economies. The IMF has estimated that by 2032 this could require as much as $14 trillion in capital in the US.
- Developed economy governments continuing to run large budget deficits that require funding through the bond markets. These deficits have been driven by the impact of this capex boom, wars, onshoring, interventionist policies, the decline of globalisation and the need to spend to gain that support of the voters.
- Central banks increasing the cost of this capital due to slightly elevated levels of inflation and a desire to see inflation move back towards target. Coupled with strong issuance in the debt and equity markets this saw an increase in the cost of capital.