November Wrap Up - Time to be picky

November was a fascinating month. While global risk assets were broadly flat-to-positive, volatility picked up as the "everything rally" of prior months lost momentum. There were clear winners and losers as investors became more discerning on the underlying economics of different businesses. This change from the everything rally to a more nuanced market is one of our key considerations as we look forward to 2026. We call out three themes for investors to consider as the new year dawns. The impact of AI on the broader macro economy and the need for a clear view on where the winners and losers of the AI boom will likely be. The effect that growing leverage may have as the fixed investment boom we have previously discussed plays out. And finally, the challenges we face in building genuinely diversified portfolios and the need to be granular in our approach to achieve that.  2026 will be an interesting year. In the meantime, I hope you have a relaxing and peaceful Christmas and enjoy some precious family time. Thank you for a great 2025.  

One of the key ideas underpinning our investment approach in 2025 has been that the global economy and financial markets are being transformed by mega forces. These include geopolitical fragmentation, demographic divergence, the future of finance and the energy transition.

But the most obvious mega force right now is AI, with a buildout of data centers to support the new AI models proceeding at a potentially unprecedented speed and scale. This shift of technology companies from traditionally capital-light, in the past they didn't need to invest much of their own cash flow to support growth, to being heavily capital-intensive is profoundly changing the investment environment and pushing limits on multiple fronts - physical, financial and socio-political. 

It is the combination of this heavy investment and the high valuation of US companies, that underpins our thinking on the key investment themes for 2026.  

We highlight three themes in particular. 

The AI buildout is dominated by a handful of companies whose spending is so large that it has an impact on the broader macro economy. This investment is front-loaded, the investment spend happens first, with resulting revenues following. This massive investment only makes sense if future revenues deliver a "fair" return on investment.

But with massive investment, massive future revenues are needed. That makes one of the key questions for investors in 2026 is whether these revenues will materialize and who will capture them. At this stage no one really knows the answer to that.

Our investment partner BlackRock makes two observations on this¹. First, we will likely need to see economic growth pivot higher, on the back of AI, to drive the economy-wide revenue growth needed to justify current levels of investment. While there are good reasons to believe that this could occur, productivity growth is already showing signs of improvement as AI rolls out across some industries, this is not a given.

The second area for us to consider is where these gains accrue.  As BlackRock notes, revenue gains from AI will increasingly be spread across sectors and the economy rather than concentrated in a handful of tech companies. Entirely new AI created revenue streams are likely to develop. Finding winners will take a lot of insight and require a granular investment approach.

As highlighted above, the AI buildout is creating a "financing hump" between front-loaded investment and back-loaded revenues. That needs long term financing - greater leverage is inevitable. This has already started as seen from recent bond sales from large tech firms.

This borrowing is in addition to the debt build up already being incurred in the public sector as governments respond to changes in global geopolitics and invest more heavily in defense and infrastructure.

Higher borrowing across public and private sectors is likely to keep upward pressure on interest rates. Elevated debt servicing costs are one reason we see the term premium, the compensation investors demand to hold long-term bonds, rising and pushing up yields. This is a source of risk from markets as we consider 2026 and is one reason our fixed income portfolios are positioned with shorter maturities than the market.

The last theme underpinning our thinking for 2026 is how we build truly diversified portfolios. Traditional diversifiers like long-term fixed income investments do not offer the portfolio ballast they once did. 

We think diversification, today, means shifting away from broad asset classes or regional views to more granular, more nimble positioning and themes that work across different scenarios. 

We don't see easy passive diversification options in this environment. We think investors should focus less on spreading risk indiscriminately and more on owning it more deliberately, in short this means taking a more active approach. This active approach to building portfolios sits at the heart of ASB's investment philosophy.

1 Source: BlackRock Investment Institute 2026 Global Outlook

This material provides general information only. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product in any jurisdiction. 

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