Name: Capital Group: The Great Global Restructuring webinar
Uploaded: 2026-01-27T09:21:04.646Z
Duration: 35 min 8 s
Description: Capital Group: The Great Global Restructuring webinar

Transcript for "Capital Group: The Great Global Restructuring webinar": Thank you for joining us today for our webinar on The Global Restructuring. The Great Global Restructuring represents the culmination of deep research across Capital Group to help understand the profound shifts that are happening across the world today and how they might impact investment dynamics over the long term with wide reaching implications for portfolios across asset classes. To help us unpack the great global restructuring, I'm delighted to be joined by three of our investment directors. I have Alvaro and Richard here in the room with me in London and I'm also pleased to be joined by Andy over in Singapore. I should also mention that our colleague Natalia Ziemann, who was built to join us, unfortunately can no longer make it today. Now in true Capital Group global fashion, I'd like to start off with Andy over in Singapore. And Andy, really before we dive into the individual pillars of the great global restructuring, can we take a step back and can you help us to understand as a summary what we mean by the great global restructuring and why investors should really be paying attention to it. Yeah, well firstly, good morning, good afternoon to everyone who's watching. So the origin of our great global restructuring project, it was actually a piece of work that we did a year ago that asked whether American exceptionalism could continue or was it under threat. And what we found was a compelling formula for firstly enduring economic growth based on The US continuing to be a key global hub of innovation. And then secondly, The US just being a great place to be an investor with world class corporate governance strongly focused on shareholder value. But since then, it's become clear that the world is going through a massive restructuring. In fact, it's probably the biggest shift that we've seen since the Second World War with dramatic changes across geopolitics, economics, trade. And this is coincident with the arrival of a transformational new technology in the form of artificial intelligence. So we're calling this the Great Global Restructuring and investors really need to pay attention very carefully because it has profound implications for how economies are going to evolve, which countries and companies are going to thrive or not, the future of globalization. And this is going to impact the wider investment landscape. Thank you, Andy. Now, let's dive deep into the first topic and I don't think it'll be much of a surprise to our audience to learn that the first topic will be artificial intelligence, Specifically, AI and its potential impact on productivity is one of the central themes of the great global restructuring. Now with so many variables, how can investors try to understand the implications? Yes, so I will answer your question, but let me just start by quickly reminding why it matters. It matters because it's basically the future of economic growth. So remember that economic growth is ultimately the resources in an economy, so kind of workforce, labor and then capital, so machines, factories, infrastructure, technology and then the ability to extract extra income from those resources, which is productivity growth. The demographic outlook in the larger economies is not that positive. Mean, basically, as we get richer, we stop having babies. And so what that means is that workforces are either flatlining or potentially declining. Then the capital picture is actually quite mixed around the world. What that means is that productivity growth is absolutely critical and that's really what leads us to artificial intelligence. History has given us a model where technological breakthroughs like the steam engine, electricity, the internet, well, they transform multiple industries and ultimately they raise productivity across the broad economy. In fact, historically, while we're generally a little bit over ambitious on how quickly we think new technologies are going to have impact, in fact, we've generally dramatically underestimated what the long term impact is going to be. So, for example, personal computers, in 1993, so this was before PCs had really penetrated the economy, estimates for the impact on productivity growth by the year 2000 were 4.8 per annum. But the actual impact was 2% per annum so it was more than double the original estimate. So if we carry that across to artificial intelligence, current estimates for the impact of AI on productivity growth by 2032 are for a positive 1.5% per annum. But if we're underestimating that, which is actually quite possible since we're all still trying to figure out how to use AI, then the actual impact could be dramatically higher. So problem solved. AI fixes the future of economic growth. Well, no, not exactly because there's really some nuance here and I'm gonna call out three. So firstly, all of the earlier technologies that I mentioned ultimately became general purpose technologies that they eventually diffused through the entire economy, ultimately benefiting most industries. However, the initial benefit accrues to the countries and companies that invest in the infrastructure that actually enables the new technology. And in this case, it's very clear that that infrastructure is benefiting The US in particular, but also China. Now, a second nuance is that the rate of diffusion of a new technology, it varies enormously across countries. So The US corporate culture of moving fast and then being willing to break things in the process, That that's gonna be an advantage, but also so will China's very different and actually remarkable ability to execute on top down directives. So The US and China will likely emerge as strategic winners with other countries initially benefiting rather less so. And the third important nuance is the impact on labor markets. So new technology has always disrupted employment. It takes jobs from workers who then go and get re educated and ultimately they move into more productive jobs. But there's always a time lag. However, with AI, the rate at which technology is disrupting jobs is accelerating and we're already seeing early signs of reduced hiring by companies, especially in younger age groups where AI is more likely to be able to displace their lower level contribution. So there's a scenario here where we see unemployment rise actually quite sharply with consequences for economies, especially in developed markets, are largely consumer driven. So how should we think about that? Well, the critical factor to watch is the balance between investment in the creation of new roles, which may be AI enabled and then technological advances. Now, if tech advances faster than investment, this would drive productivity in certain industries. For example, you only need to employ one engineer rather than five engineers. Now that's good for investors, but it could also drive a major supply shock and it disrupt the labor market because obviously, it's not so good for the four engineers that lose their job. And so it's a shift of gains from labor to capital. But at the same time, if investment keeps up with technology, then the economy has time to build new applications for that technology that enable continued productive employment. Okay. So where are we now? Well, obviously, the technology is advancing, but we're also seeing accelerating investment in AI by corporates, and that's both AI service providers, also companies in general, and actually also by individuals. And that implies more of a golden lock scenario, but it's actually one that we need to watch very, very carefully over time. Great. Thank you, Andy. So my final question to you for now is how can we sum up the possible impact of AI on investment portfolios? If the impact is widespread as expected, how could we meaningfully invest behind this theme? Well, the big picture here is that new technologies typically follow the same investment trajectory where the first phase is about the installation of the new technology. So think rails for railroads, service and networks for the internet. And then the second phase where the technology is deployed and everyone figures out how to use it. So build out the West Coast Of The US, adoption of iPhones, social media, ride sharing. The biggest investment gains generally come in phase two. Think of the telecom infrastructure companies in the 1990s, which produced strong returns for a short period of time and then compare them with the internet apps in this century, which have produced some of the highest returns of all time for a couple of decades. And there's also a rather uncomfortable that the transition between these two phases, so from installation to deployment, is usually marked by a financial crash. So is it going to be the same this time? Are we going to get a crash of AI infrastructure? It's definitely the topic of the moment and the answer at the time of doing this webinar in early twenty twenty six is possibly but likely not just yet. So why do I say that? Well, firstly, the valuations of many of the AI infrastructure companies, I mean they do appear quite high, but they seem much more reasonable when you factor in future revenue and profit growth. So will that growth come through? Well, the hyperscalers that are doing most of the AI infrastructure build out certainly have the profits and cash flows to pay for it. And they're also saying that existing AI infrastructure is at 95% utilization. So It's very different from the telecom fiber situation in the dot com bust, in 2002, while utilization was at 3% only. But there are estimates that total spending on AI infrastructure will have reached $7,000,000,000,000 by the middle of the next decade. How how can that scale of investment ever have an attractive return? Well, if you assume that AI can take meaningful market share of the $40,000,000,000,000 global knowledge worker economy, so assume that's the addressable market, then actually, well, is a case for this scale of investment, but it does depend on companies finding productive ways to deploy AI to improve their performance and productivity within the next three to five years. And at this stage, the jury's out, but we're optimistic. So we're meeting with a lot of companies. So banks, industrials, retailers, pharmaceuticals, software companies definitely where they have hard evidence that AI is really impacting their bottom line. And I'd also highlight that for several years now, our approach to investing in AI in our client portfolios has actually moved beyond simply the semiconductor and data center companies. Our research has found, well, other tech and internet rated companies where they've been able to demonstrate material impact from AI on the performance of their products or the productivity of their organizations. But what we're finding today is that actually the most innovative companies in every industry have embraced AI and it's really moving the needle for their business results. Great, thank you Andy. So AI's impact is widespread and in particular its impact on productivity. There's growing focus now on The US and global debt rising, but AI and higher productivity is seen as a key factor in keeping this in check. Alvaro, I'd like to bring you into the conversation now. What does this debt backdrop mean for markets globally? Thank you, John. So actually this is a question that is becoming more recurrent in markets and particularly since the White House announced the one big beautiful bill which basically is going to lock in fiscal deficits around 7% compared to the current 6.4 or 6.5%. And actually what you can feel here is not about like the change, overall change, but it's about like the absolute number because these are very high absolute numbers in case The US faces a potential economic slowdown recession. Here the maneuver of the US administration is going to be relatively limited. With that being said, are like three key factors that I want to highlight because I think they are important to answer these questions. So the first one is context perspective because if I take a look at the world, there are at least 15 countries with debt to GDP levels above this 100% threshold. So this is a global phenomenon. It's not a US issue. And even in The US, if you take a look at The US over the past two decades, this overall increase from 35% to 100%, debt to GDP increase. This has been coming from two idiosyncratic and I would say extraordinary events. And that was GFC, the package fiscal stimulus that followed the crisis and then also COVID. If you remove all these two periods, then the overall increase over these past two decades will be relatively flat. Second point is the role that actually The US plays out in this global financial system, which is the USD, the dollar, being the world reserve currency. And this actually has implications, which basically means The US is able to accumulate higher and higher debt levels while maintaining borrowing costs relatively low and a currency stable. And that's because there is always demand for dollar assets. And this actually brings me to my third point, which is policymakers, they have multiple levers to actually solve this problem. The main one or the most promising one is what actually Andy described early on, which is the huge impact that productivity can have on debt to GDP ratio. Just to give you some numbers here, but if we assume everything constant except for productivity increasing just 0.5 over the next thirty years, that will mean that the debt to GDP ratio over that time would increase only 15%. While if everything stays as it is right now, this increase would be roughly more than 50%. So you can get a sense of how impactful productivity can have, you know, on this problem. The second is that Central Bankers actually can help here. So either if they engage in forward guidance or quantitative easing, they can maintain borrowing cost low. And actually even the White House, if they want to actually incentivize some strategic sectors via tax credits for instance, they can actually bring more revenues. So again, like if you put everything together, I think it's very important for investors to be reminded that The US is in a very privileged position. This doesn't actually mean that risks are not emerging. Actually, we have seen the market putting a bit more stress in certain countries. Japan, France and UK in 2022. So that means that if investors rely on this defensive allocation domestic government bonds, you can be a bit more exposed here. So that's why a more diversified approach towards government bonds and being active can play a good role here. Thank you Alvaro, lots of implications there. Now one of the key points you raised is the role of the US dollar and currently there's a lot of debate around its status as the world's reserve currency. So what are the potential scenarios and implications there for investors? Yeah, actually if we move back, actually we look back to the early 40s during the Bretton Woods agreement. So that was a meeting where global leaders they gathered in order to discuss a transparent benchmark for international transactions. And basically the outcome of that meeting was that the dollar they decided that it will be pegged to gold and then multiple other currencies will be pegged to the dollar. So then as you can see here, since that moment, the dollar was playing an anchor role in this global financial architecture. Actually, after the Bretton Woods agreement collapsed in the early seventies, still the dollar was playing a key role and that's because foreign investors, they were still trusting US institutions and because US capital markets, were like much larger and had more depth than any other market. So that's why if actually we move fast forward to today, the dollar if I look around is the preferable medium of exchange 50% of the transactions international, they are invoiced in dollars. Second is the preferable reserve assets and that's why if you take a look at Forex reserves, are in dollars and actually like even during stress periods in markets, the reality is that investors, they tend to go to US dollar. So either in GFC or in in COVID. So again, like, the overall conclusion here is that the dollar still looks that is going to play a key role. I'm not saying that they are not risk actually emerging. Actually, we look back the past five to ten years. There's been like a lot of debate of the potentially the Fed being less independent. This could actually potentially trigger some investors not relying on the dollar anymore. We have seen actually some alternative payment systems being developed. I'm talking about like blockchain transactions. China has actually developed one payment system where you can make Yuan payments across different banks in different countries. So like we acknowledge that but the reality is that there is no alternative to the dollar right now. That's actually this triggers the second question that many investors might be asking themselves, which is was the huge depreciation that we saw 10% during the 2025, was this already a sign for the dollar to lose this status? And the short answer is we don't believe so. Because if that was the case, investors would have rejected US assets across equity, credit and rates. And if you take a look right now, the reality is that equities, they are at very high valuations near or at all time history highs, spreads are incredibly tight and then rates actually didn't sell off alongside this huge depreciation of the dollar. So we believe that the most plausible answer actually is that investors are discounting a structural discount to the dollar. So again, long answer to say we believe that actually the dollar has always gonna play a key role in the next coming years. Great, thank you Alvaro. And my last question for you to wrap up this section concerning fixed income and bond markets is how can bond investors really best position themselves for the great global restructuring? Yeah, so the overall conclusion for all these theme is that The US can still play a big role, but risk are emerging. Investors need to acknowledge that. So you have to be diversified. Actually in great markets, this is something that can be achievable in a very easy way because the US Treasury market represents roughly 30% of the government outstanding debt. And again like we mentioned before, know, like with these levels of debt across many different currencies, the market is going to test more often and it's going be a bit more disciplined making sure to which governments they want to lend money. So that's why if you want to insulate your portfolio from these idiosyncratic sharp off moves, it's better to be allocated, you know, in these defensive buckets, a diversified allocation of different government bonds. It can be US treasuries, bonds, etcetera. So that's in rates. In credit actually the story is a bit more nuanced because if you take a look at credit markets, the reality is that more than or between 7080% of the credit markets are dollar denominated. So yes, is something that investors should pursue, but the reality is that if you want to be diversified in terms of sectors, companies, etc, need to have a significant allocation to The US. EM actually is a good choice. This has been a market which has been actually growing in the past decade. Fundamentals look very strong. So this is a very nice way actually to diversify, you know, risk that might be coming from developed markets. And actually lastly, that's just touching on currency because we mentioned that in the long term we are positive on the dollar. The reality is that in the short term the environment can be a bit more uncertain, you know, because growth and real rates between US and the rest of the world may be converging. So we might see some stress still in the dollar, particularly over the next twelve months. Great. Thank you Alvaro for walking us through the implications when it comes to fixed income markets. Richard, I'd like to turn to you now and really looking past at the major thematic drivers of the GRACE global restructuring, what are the possible implications for regional equity markets such as Europe, emerging markets for example? After decades of US dominance, is the picture changing and how can investors capture that? Well, thanks for the question, John. We know the US administration is trying to address trade imbalances via a tariff policy. That's not new. We've seen it before. You have to say historically there's been little success, but this is obviously a bigger effort, more disruptive for world trade. I think it will impact capital flows and asset prices. One obvious implication is if trade is just more difficult, our country is going to try to be more self sufficient, and I think we see evidence of that. But I think in a way, if you are a country that makes things that The US doesn't make or can't make at the moment, and maybe Taiwan and chips is the best example that's a great opportunity for you. The US needs those chips. US companies need those chips. There's not much the administration can do to interrupt that flow. It's probably more of a challenge for companies like, say, Germany who make things that The US is well supplied with, that are price sensitive, etc. So it's a different challenge for different countries. Also think no disagreement with Alvaro's comments on the structural position of the dollar but from this perspective, you've got to assume that the US administration will be comfortable with a gently weaker dollar, makes exports more attractive, makes imports more expensive, etc. So from that perspective, we think the administration will fight against a gently weaker dollar. Understood, thank you Richard. Now just turning gears a little bit, the potential for greater global competitiveness seems to be one of the consequences of the great global restructuring and another factor in this is the rise of corporate governance and more sustainable shareholder friendliness initiatives. We've seen this in countries such as Japan, Korea for example, who seem to be leading the way. Can you explain what these value up programmes actually mean for investors? Well, think when we looked at our US exceptionalism paper, one of the advantages The US has that when you invest in a US company, management are clearly running the company for shareholders. You are aligned with the management of the company and that's not the case around the world. I think Japan has been on a long journey to improve the shareholder friendliness of companies. They are pushing for more efficient balance sheets, bigger dividend payments, even merger and acquisition policy which is rare in Japan. So they're a long journey. Korea started in 2024 with their Value Up program. Korea has always had complex webs of cross shareholdings that have made that more obscure for external shareholders. They are starting to be unwound and the companies that have signed up for the Value Up programme have actually outperformed those that haven't and the broader market quite significantly since the start of that programme. So that looks like it's having good benefits. And you see the same in China similar programmes in China trying to increase shareholder value. And I think most investors recognise that when you marry a low starting valuation with improved corporate governance, that can lead to good share price moves. So we see that as an encouraging trend. It's not quick. It's going to take a while, but that's aiming in the right direction. Thank you, Richard. Indeed, very clear implications for those regional markets. Now my last question for you is we continue to see short term geopolitical upheavals and changing trade patterns as another key tenet of the great global restructuring. So how exactly can investors make sure that they're on the right side of these trends? No argument, it's an interesting time to invest. I think from our perspective, we are global stock pickers trying to identify good companies at reasonable valuations where in the world. I find it interesting that you look at our range of global equity portfolios and when we find US based companies that are market leaders at attractive valuations, where in often cases there is no global alternative, there is no global non US alternative to Microsoft, for example, so we invest in Microsoft. But in areas where you can choose US domiciled or European and Asian domiciled companies like industrials, in healthcare and in financials to a certain extent, I noticed that our portfolios have moved away from expensive US to better value European and Asian companies in the last five, six years. So in some of our global portfolios, we sit with a significant underweight to The US listed companies overweight Europe and Asia and that reflects our bottom up stock pickers identifying better value in the non US markets. That doesn't mean we don't like The US economy. We don't think The US economy is going to grow certainly faster than the European economy, but that's where we see the valuation adjusted opportunities. Got it. Very clear. Thank you Richard. I think maybe now is a good time to come back to Andy in Singapore to ask if you could really pull together some of the themes outlined today and give a sense how we at Capital Group are thinking about the great global restructuring and ensure that our clients are well positioned for these changes? The great global restructuring impacts every component of every investor's portfolio, there's a lot to say here. But let me just distill it down to four major actions. Firstly, portfolios need to be global. America may well continue to be exceptional, and it should remain a large part of an investor's portfolio, but the rest of the world is closing the gap fundamentals, governance, and valuation. And even if you simply wanted a focused AI portfolio, it would still need to be global because so much of the infrastructure supply chain is anchored in Asia and to some extent Europe. Secondly, focus on innovation. Now, I'm not sure if the current AI infrastructure boom is going to be a bubble, but history tells us that over time, the big winners will not be the companies that install the technology, but instead they're going to be the companies that use the new technology to improve performance and productivity, sometimes literally to create new industries. The applications and innovation is going to be the key to finding these companies. Next, dynamic research focused fixed income portfolios. Both debt sustainability and central bank independence, they're uncertain, meaning that inflation is going to be harder to manage. Term premiums are going to increase. Macro positioning is going to be more volatile. So build portfolios that make dynamic allocations and of course are research based. And finally, portfolios need to be active. I know this sounds very self serving coming from one of the world's largest active managers, but some companies and countries are going to navigate this restructuring with skill and success. Others won't. So finding the winners is going to be critical but avoiding the losers is also really important and that's where active wins hands down. I also want to highlight that there's actually a lot more to the great global restructuring than what we've covered today and in fact, it's an ongoing effort for us. We're publishing a piece on the spread of political populism around the world, what that means for investing and we're publishing a steady stream of new content in the coming months that really should help investors to navigate this rather fluid and unpredictable environment. Excellent. Thank you, Andy, and thank you to Alvaro and Richards for unpacking some of the key investment implications behind the Grace Global Restructuring. We genuinely believe that this is a multi year, if not multi decade theme with wide reaching implications across portfolios and asset classes. As such, this won't be the last time that you hear from us and we'll continue to bring out fresh and differentiating insights to help you and your clients navigate the market. Please do not hesitate to contact your Capital Group representative should you wish to learn more. All that's left for me to say is thank you. I hope you found this insightful and we'd love to continue the conversation.