Hello and welcome to our latest video #MacroMemo. As always, quite a lot on the calendar here. We'll talk about the AI scare trade that had software companies valuations recently falling on concerns that AI would displace them. We will talk further to the AI story about data centres and their ravenous need for electrical power, and how that could be a serious constraint on the aspirations of some of the hyperscaler companies.

Continuing on the market front, we'll also talk about this macro regime and the extent to which it's actually pretty favorable for financial markets, at least theoretically. From there, we're going to pivot. We're going to switch to the economy a bit more formally. We'll talk a bit about some updated growth forecasts. We'll talk about the changing global order.

We'll talk about how Africa is actually outgrowing Asia, potentially, from an economic standpoint.

We will finish with a couple maybe slightly more granular thoughts. One is just looking at Australia rate hiking. Does that mean that the rest of the world is about to follow suit? I'll give you a little hint: probably not, but it's worth watching.

And then lastly, we're going to spend a moment on Europe and the UK, having sort of neglected them more than we should have in recent months. Okay. That's the plan.

Let's jump into item number one: Artificial intelligence scare trade. There has been very visible recent churn in the stock market. And a significant part of that has been declining software stock valuations.

Essentially, that is markets expressing concern about artificial intelligence disrupting software companies. AI has become very good at computer programing. Could they be eroding the moats of many software companies and undermining them? That is the question without a completely clear answer just yet. But to some degree, the answer would seem to be yes.

This is, by the way, a very useful reminder that artificial intelligence brings both winners and losers. Right now, the AI creators are winning. They're developing the models. And valuations are broadly going up.

We do think many implementers, the companies that will embrace AI and use it to their benefit, will benefit significantly over time, though. I think we're waiting on major benefits on that front right now.

But there are also some companies at risk of being disrupted as per some software companies. And again software is maybe the most obvious example right now.

We would say that recent price action, that is to say weakness, could be overdone on the aggregate. At a bare minimum, I would say that the market is perhaps painted with too broad a brush in the sense that some software companies do still, we think, enjoy significant moats despite AI disruption.

So opportunities for active investors on that front. I should just mention as well, we are still relatively optimistic on AI from a productivity standpoint, more fundamentally, in terms of this being a true general-purpose technology and able to enhance financial well-being, in all likelihood, over time.

On subject number two, also artificial intelligence-linked: one of the big needs for artificial intelligence is data centres and lots of them.

We see data centres rising quickly in number and capacity. And one of the critical needs for those data centres is electricity. And so, electricity demand from data centres has been rising pretty astonishingly, 18% annually from 2018 to 2023.

Recall, distributed computing, cloud computing, was rising quickly even before the AI push began in earnest a few years ago.

And so at this point in time, data centres have gone from consuming 1.9% of U.S. electricity to 4.4% of the grid over that period of time. Forecasts are this will rise very significantly further in just the next few years. By 2028, which is not far away, the expectation is that 4.4% share goes up to between 6.7 and 12% of the electrical grid.

The fundamental challenge here is it's hard for electricity capacity to rise as quickly as that, to keep pace, essentially. And it should be noted that, as much as there are a lot of proposals to add capacity to the grid, the vast, vast majority are never actually delivered. And much of that it’s a very challenging regulatory environment.

Maybe that will get a bit easier over time. But equally, you can say many of the green subsidies that have been encouraging solar and the wind efforts have recently gone away. And so it's not at all clear that we will see as much additional electricity capacity as desired. And at a bare minimum, there is a real time mismatch here, which is the plans to invest in data centers and the expectation that they will increase their output are quite near-term in nature.

It takes four years to make a new addition to the electrical grid. Moreover, public and political attitudes have been souring toward that right now. Rising electricity costs for the public have been significant and would, in theory, continue to be quite significant if the electricity demand goes up. And so just to frame this, electricity supply in the U.S. is maybe the biggest risk to hyperscaler AI plans.

We will see whether they can deliver the 50%+ CapEx growth they're planning for this year and beyond. In general, we've been optimistic that there's value to that investment and they will deliver that investment. But this does raise the question: can they get the electricity they need to follow through on that? And it speaks to a big advantage that China has. China, the other major AI innovator, has plenty of electricity.

Its capacity is growing quickly. It has in the realm of about twice as much electricity generation ability as the U.S. as it stands right now. So that's not a pinch point for China. And so even though China is lagging in the AI race, this is their trump card of sorts. This is something that is very much to their advantage and could make it a much closer race.

Similarly, we're not sure it fully constrains the U.S., but it is, at a minimum, a downside risk to the AI outlook for the U.S.

Okay, on from there. We'll stick with markets, we’ll shift away from artificial intelligence. Just thinking about macro regimes, the idea being if you can identify what kind of economic environment you're in, that can then tell you the sort of market returns you might realistically expect to find.

And so let's just do a really simple one here. Let's say there are four main macro regimes. And it's a two-by-two matrix. And so the one axis is, is the economy expanding or are you in recession? And the other axis is, is the central bank cutting rates or is the central bank hiking rates?

So that's your two-by-two matrix. That's the four different permutations. And so the current regime in our view, appears to be – and we think can continue at least for 2026 – to be the combination of economic expansion plus rate cutting. We don't think a recession is too likely. We have rate cuts in the rearview mirror.

The U.S. Federal Reserve may deliver a bit more, Bank of England might deliver a bit more, and so on. And so that is a combination that is historically the most favorable for financial markets. So using the U.S. markets as a bellwether, the S&P 500, historically the mean return in such environments has been 11.7% per year, which is quite attractive.

The U.S. 10-year yield has historically generated a mean return of 9.8% during such regimes, which is very attractive for the bond market, even if maybe you wonder whether that kind of gain is possible this time round. And we might express a bit of skepticism, but we're just focusing on historical regimes here. You combine that into a 60-40 type of simple investment portfolio and you get a low double-digit return.

So it is traditionally quite a favorable return. There is, of course, variance. And there are exceptions to the rule that it's quite favorable. But even the variance isn't that large compared to some of the other regimes. And obviously there are other regimes.

And so, you know, the recession plus rate-hiking regime is the worst of all, though it only happens point 2% of the time.

We don't think that's where we are right now. You do get mid-single digit 60-40 portfolio returns from the combination of an economic expansion plus tightening. And we're paying attention to that because we could find ourselves there at some point in the next year or two.

Or you get mid-single digit returns, actually, from a recession plus monetary easing, which doesn't seem to be where we are, but nevertheless good to fill in that fourth plank.

But again, the point is it is theoretically a good time for financial markets when the economy is expanding and rate cuts are happening. Historically, you would expect a couple more years of solid returns when you're in this kind of investment regime. Obviously, it's not the only thing we need to think about. And other things could yet interfere.

But the point is, it is a promising backdrop. All right, let's talk about economic forecasts for a moment. So we're constantly refining our forecasts. That is a perpetual task. Certainly not the only thing that informs markets, but it is one of the more relevant macro considerations. And I just wanted to summarize the main thrust of some of the recent changes we've been making across five axes here.

And so one would be are we upgrading or downgrading our growth forecasts? For the most part we're upgrading. So we are becoming more optimistic, not less optimistic. How do they look on an absolute basis for fast growth? Slow growth? OK growth? I would say pretty good growth. We've got about 2.5% growth in the U.S. We've got at 1.8% for the Eurozone.

We have 1.4% for Canada, which sounds low without population growth. It's actually not bad. And so decent levels if not a bit better than decent.

What about momentum? Is growth accelerating from the prior year into the next year? And so momentum is mostly positive. For the U.S., it's steady.

It's already been pretty good. It stays, we think, pretty good. Most of the other developed markets are accelerating, are set to grow, we think, faster in 2026 than 2025, which obviously is an attractive thought.

What about across countries? Well, we still have the U.S. economy growing faster than most of its developed world peers, but less of a growth advantage than in recent years.

So maybe a bit less U.S. exceptionalism, which I'm going to talk about again in a moment.

And then, the fifth question is versus consensus. So are we optimistic versus consensus? Maybe this is the only one that matters to the extent the market in theory has already built in everything else.

As it happens, we are actually a little bit above consensus for most countries for their growth as well. And so again, to make the point, it's a constructive backdrop for markets. Things can happen if your data centers are a problem or if electricity generation is a constraint or any number of other things.

Obviously then the story could be quite different. But the macro backdrop is fairly favorable to risk assets and to markets more generally. Okay.

Let's talk global order here. Boy, I'm biting off more than I can chew with some of these big subjects. And so not to speak through it all, but of course, here we are now in a multi-polar world, which is a new development in the last decade. Plus, here we are, seemingly in a power-based order, having abandoned the rules-based order.

We've talked about that in the past. And then here we are, perhaps, with some amount of declining U.S. exceptionalism. Not gone, but just the U.S. has become a little bit less special. And why is that?

Well, you know, the U.S. has seemingly consciously relinquished its control of the global order and has some fiscal excesses and, of course, some political instability domestically and some antagonism to the rest of the world, and maybe a growth advantage not quite as big as it was before, as was just mentioned.

And so the rest of the world has lost a lot of trust in the U.S. There's a lot to unpack there, and I won't even try. I want to focus on just the last element, which is the rest of the world losing trust in the U.S. There are some pretty fascinating surveys that quantify this.

There's a Democracy Perceptions Index. It finds the world view of the U.S. fell from a positive 20% in terms of favorability in 2024 to a -5% or so in 2025. So the world is net negative now on the U.S., where it has not been for quite some time.

Meanwhile, the world view of China has actually been rising. It’s now significantly higher than the U.S. and is actually a fairly small net positive.

And so a real reversal there. China using this to its advantage. And similarly, looking across different countries and their attitudes toward the U.S., of course, it’s inevitably more varied. But 19 of 24 countries, their public’s attitude toward the U.S. became worse in 2025. And now fully half of those countries are negative, including Mexico, Canada and most of Europe as well.

And so we would just frame this, the declining U.S. exceptionalism trade, as it were, as supporting a weaker U.S. dollar. It's happened already. We think there's room for more over the coming years, supporting a steeper yield curve. It is already fairly steep. We think that's appropriate. And maybe a slight ding to U.S. growth as much as there are other forces to think about as well.

Okay. Africa versus Asia, maybe not a pairing you think about all that often. And maybe from an investment standpoint you think about very little at all. Believe it or not, Africa is seemingly on track to outgrow Asia from a real GDP perspective in the coming years. Depends on your definition.

Some fairly generous definitions of Africa outgrowing Asia in 2026 this year, more conservatively focusing on really, sub-Saharan Africa versus emerging and developing Asia, which means you're cutting out Japan and a slow-growing country.

You get there by 2030. So one way or the other, these are more similar than you would think already. Maybe not definitively, but with some level of reasonable conviction, Africa set to match or even exceed Asia within the next few years. And of course, very contrary to the perception about the two regions, which is that Asia is this economic star and Africa is this economic laggard. They're actually moving more similarly.

And by 2030, the forecast is sub-Saharan Africa grows 4.6% real GDP and emerging Asia gross 4.5. So it's the same, really, but quite good. Both quite good. I think we all can rhyme off impressive Asian economies that are growing quickly. India, China, Vietnam, Philippines, Indonesia would be just some of the bigger ones.

We know much less about African champions. These are all going to be 2026 numbers: Ethiopia set to grow 7.1%. Ivory coast set to grow 6.4. Tanzania 6.3. Kenya 4.9. Ghana 4.8. Nigeria 4.2. These are moving quite quickly as well. Now do note maybe the Asian source of economic growth is higher quality.

It's skewed towards productivity gains, which is what you really like to see in a general sense. And also from a market return perspective, Africa is more fueled by demographics and has really fast, population growth, quite high fertility rates. That's not useless. That has value too for investors in the sense that many companies are geared toward the number of customers.

Everybody's got a cell phone. More people is more cell phones, that kind of thing. And so there is certainly value for investors to that as well. And pretty amazingly, there is an African sub-Saharan x South Africa index that's up 85% year over year. So, not a complete secret. Africa goes from 18% of the world's population right now to nearly 40% by 2100.

So it will be 2/5 of the world and double its share by then. Just to make the point, Africa is a fascinating place. It might be doing better than you think. It's still hard in some cases to invest in it. These are more frontier markets than emerging markets, but nevertheless certainly worth paying increasing attention – and recognizing some of the recent strength in particular has been precious metals. About 30% of the world's gold is produced in sub-Saharan Africa.

Okay, two more real quick ones from me. One would be the central Bank of Australia hiked rates recently. Seems to think it will do so again. That has sometimes been a leading indicator for the Fed and other central banks.

They’ve moved more quickly than the Fed in the last few years. And so we need to pay close attention to this. The question is, is this telling us something that is of relevance to the rest of the world? Not to bore you here, but the answer, I think, is maybe not. Australian inflation picked up in the second half of last year.

That's not been the experience elsewhere. Australia's labor market is tight, a bit less so elsewhere. Australia's housing market has picked up. It's the strongest in the G7, not so much elsewhere. Australia is reporting that the uncertainty implicitly around U.S. trade policy is really not depressing activity there, whereas it is in Canada and, maybe to a lesser extent, in Europe.

So I'm not sure it's telling us too, too much, but I will say, let's just recognize that we are certainly in the advanced stages of an easing cycle for much of the world. Some central banks like the ECB (European Central Bank) and maybe the Bank of Canada could now be done. And so not to say that hiking starts the next month, but it's not impossible that we pivot in that direction over the next few years and it's just worth keeping that in mind.

It would be a different investment regime. It would maybe be a slightly less favorable one. Okay, I'm going to finish just with the quickest of touches on Europe and the UK. And so those regions didn't do all that great in 2025 from an economic standpoint. In a nutshell, we think there's room for them to do somewhat better in 2026.

We see monetary policy that's less restrictive, more generous. We have fiscal policy that’s more stimulative, maybe starting to actually bite in Germany a little bit later than people had thought. The UK, the fiscal drag there is set to be less than feared because, politically, it was difficult to push through. And we do think consumers in both those markets have some room to spend.

Inflation is falling, which is good for purchasing power. Eurozone labor market is healthy at a minimum. Both regions have high savings rates. And so there's room to save and to spend. Spending essentially to help grow incomes. And so not to oversell things, but on the net, we do look for better growth in 2026. And we are a bit above consensus for those markets as well.

All right. That was a lot. Thanks for sticking with me. Wish you well with your investing. Please tune in again next time.