Barclays Investment Bank

I’ve been around credit markets long enough to remember the telecoms boom at the turn of the century. In fact, I was a TMT analyst back then, which perhaps says something about how long I’ve been doing this! We’ve seen periods of outsized debt issuance before. Telecoms, banks ahead of the 2008 financial crisis, energy, and more recently software. The historical evidence is difficult to ignore. Now we’re seeing another significant wave of borrowing to finance AI. And there are good reasons to believe this cycle is different. For one thing, the hyperscalers have substantial cash flows that many of the companies in previous cycles simply didn’t. But you have to look at what you’re actually lending against. Data-center-backed bonds, for example, can have amortization built in and relatively strong lease arrangements. That’s quite different from unsecured hyperscaler debt or chip financing, where the risks and protections aren’t necessarily the same. I’m particularly focused on construction risk in the near term. Delays can push out expected cash flows, even where the underlying investment ultimately performs as intended. Longer term, questions around chip depreciation could become more significant. Thank you to Bloomberg for having me at its Future of Fixed Income event to discuss how the AI investment cycle is changing credit markets, and what investors should be watching as borrowing grows. Watch my full panel here: https://lnkd.in/eNd5ZUg2

Some of the best conversations with clients start with a simple question: what needs to change? I had the pleasure of hosting our London Metal Exchange dinner in London, bringing together investors and leaders from some of the world’s largest mining companies, representing around $1 trillion in market value. There was plenty to discuss. With copper at around $6.60/lb, demand is being shaped by the reindustrialisation of the West, itself underpinned by the AI value chain, electrification and defence. In this environment the strategic importance of mining is becoming increasingly clear. But meeting that opportunity raises an important question for the industry. A decade ago, miners pivoted away from investing for the “commodity super cycle” and toward “value over volumes.” Since then, the largest miners have, in aggregate, matched capital investment with cash returns to investors. So, is it time to pivot again? The answer is not straightforward. The sector is considering how to satisfy significant sources of demand, while navigating a challenging investment backdrop. Many in the sector are asking: “what is the appropriate cost of capital in an environment that includes significantly higher Treasury yields, potential crowding out in the IG debt market from increased Hyperscaler issuances, elevated volatility, and geopolitical risk?” For me, that makes the conversation about more than simply investing for growth. It’s about how the industry can invest with conviction while maintaining the capital discipline built over the past decade. That balance will require long-term perspective and commitment from both miners and investors. It’s a fantastically dynamic time for the sector, and I’m proud of our global mining teams across Barclays and their partnership with clients as they consider the opportunities, risks and choices ahead.

Retailers are absorbing higher manufacturing costs before they reach US consumers. What happens when that buffer fades? In the latest Barclays Brief, Priya Ohri-Gupta, CFA explains that consumers have remained resilient despite persistent inflation, but not all the pressure in the system has reached households yet. She sits down with Ronnie Wexler to explore what further cost pass-through could mean for spending and the business characteristics most likely to succeed in this inflationary environment. Listen to the latest Barclays Brief: http://ms.spr.ly/6045avUNT

Bond yields are rolling over. That may mean growth concerns are rising for AI. Alexander Altmann examines how AI is influencing economic growth, earnings resilience and the bond market, and what rising growth concerns could mean for risk assets. Watch the latest #MorningMatchawithAlty for his take. 👀