Higher borrowing costs, AI-led investment cycle to shape global markets in coming years: Moody's
New Delhi, July 20
Global financial markets are entering a prolonged phase of structurally higher borrowing costs, sustained investment in artificial intelligence and infrastructure, and elevated geopolitical risks, with investors increasingly positioning capital around these long-term trends, according to a Moody's Ratings cross-sector report.
The report, "A new macro regime is driving differentiated repricing across financial assets", said market pricing across bonds, equities, credit and commodities indicates that the post-2008 era of ultra-low interest rates and subdued inflation has given way to a fundamentally different macroeconomic environment.
"A common refrain is that financial markets are disconnected from the real economy and thus underpricing macro risk. We disagree and see market pricing... as a coherent response to a macro regime shift - away from the post-2008 world of low growth, subdued inflation and suppressed real rates, toward one of greater uncertainty, structurally higher real rates, and policy shaped by geoeconomic and security concerns," the report said.
Moody's said government bond markets suggest higher interest rates are likely to persist. The report noted that 10-year sovereign bond yields across advanced economies have climbed back to levels seen before the global financial crisis, reflecting expectations of stronger investment demand, larger fiscal deficits and structurally higher inflation.
"Long-term government bond yields have risen structurally across advanced economies, marking a durable repricing of duration risk," the report said. It added that stronger investment demand, firmer inflation and higher government borrowing are leading investors to expect policy rates to remain higher over the long run.
The report said capital is expected to continue flowing towards sectors supported by long-term policy priorities such as AI, semiconductors, defence, electrification and critical minerals, while sectors facing AI-driven disruption or structural cost pressures are likely to lag.
"The sectors attracting disproportionate capital and policy support - AI and adjacent technologies, defence, critical minerals and energy-transition plays - share these characteristics. Those lagging adoption or facing structural cost pressure are repricing in the opposite direction," Moody's said.
According to the report, industrial metals are increasingly being supported by structural investment in digital infrastructure and the energy transition rather than the traditional business cycle, while geopolitical tensions continue to keep a premium embedded in energy prices.
Looking ahead, Moody's cautioned that current market valuations assume AI investment will deliver productivity gains, funding conditions will remain supportive and geopolitical tensions will not worsen significantly.
"Current pricing hinges on whether expectations for policy-supported, capital-intensive growth translate into real earnings and productivity gains. Any slippage in outcomes, tightening in funding, stress in opaque credit channels or an escalation in geopolitical fragmentation could expose vulnerabilities and trigger a broad reassessment of valuations and credit risk," the report said.
— ANI
Reader Comments
As a small business owner, this is worrying. We're already paying 12-15% interest on working capital loans. If global rates stay high, RBI will have limited room to cut rates. The government should focus on reducing fiscal deficit and making credit accessible for productive sectors. AI investment sounds great but our basic infrastructure needs attention first.🙏
Interesting analysis from Moody's. I manage a small portfolio and have been moving into AI-related ETFs and commodities over the past year. The report's caution about valuations is valid - we're pricing in a lot of optimism. But I think the structural shift is real, especially with deglobalisation and defence spending rising. India stands to benefit as a manufacturing alternative to China.
I'm a PhD student researching AI ethics, and this report makes me think about the social costs. While capital flows into AI, what about the millions of Indian IT workers whose jobs might get disrupted? The government needs a comprehensive retraining plan. Higher borrowing costs also mean less funding for climate adaptation - we're facing heatwaves and floods but investments are going to semiconductors and defence. Something is off-balance here. 😔
Good analysis but overly focused on US/EU markets. India's situation is different - our bond yields are already higher, our banking system is well-capitalised, and domestic savings are strong. The PLI schemes and infrastructure push will attract capital regardless of global rates. However, the RBI must keep inflation in check. Let's not forget the 2013 taper tantrum - we're better prepared now but still vulnerable to global shocks. 🇮🇳
R Rohit P