Why is the current macroeconomic environment favorable for risky assets?

Original author: arndxt_xo

Original translation by: AididiaoJP, Foresight News

In short: I am bullish on risk assets in the short term because AI capital expenditure, consumption driven by the wealthy, and still relatively high nominal growth are all structurally favorable to corporate profits.

To put it more simply: when borrowing costs are low, “risky assets” usually perform well.

But at the same time, I have serious doubts about the story we're currently telling about what all this means for the next decade:

• Sovereign debt problems cannot be resolved without a combination of inflation, financial repression, or unforeseen events.
• Fertility rates and population structure will implicitly limit real economic growth and quietly amplify political risks.
• Asia, especially China, will increasingly become a key definer of both opportunities and tail risks.

Therefore, the trend continues, and we should continue to hold those profit-generating engines. However, building a portfolio requires recognizing that the road to currency devaluation and demographic restructuring will be fraught with difficulties, not smooth sailing.

The Illusion of Consensus

If you only read the opinions of major institutions, you might think we live in the most perfect macro world:

Economic growth is “resilient,” inflation is sliding toward the target, artificial intelligence is a long-term tailwind, and Asia is a new engine for diversification.

HSBC’s latest Q1 2026 outlook clearly reflects this consensus: stay in the equity bull market, overweight technology and communication services, bet on AI winners and Asian markets, lock in investment-grade bond yields, and use alternative and multi-asset strategies to smooth out volatility.

I actually partially agree with that view. But if you stop there, you'll miss the really important story.

Beneath the surface, the reality is:

• A profit cycle driven by AI capital expenditures is far more powerful than people imagined.
• A monetary policy transmission mechanism that has become partially ineffective due to the massive public debt piling up on private balance sheets.
• Some structural time bombs—sovereign debt, a collapse in birth rates, and geopolitical restructuring—are irrelevant to the current quarter, but crucial to what “risk assets” themselves mean a decade from now.

This article is my attempt to reconcile these two worlds: one is a glamorous and easily marketable story of "resilience," and the other is a chaotic, complex, and path-dependent macro reality.

1. Market consensus

Let's start with the general view of institutional investors.

Their logic is simple:

• The stock market bull run continues, but volatility has increased.
• A diversified sector portfolio is recommended: overweight technology and communications, while also allocating to utilities (electricity demand), industrials, and financials to achieve value and diversification.
• Use alternative investments and multi-asset strategies to cope with downturns—such as gold, hedge funds, private credit/equity, infrastructure, and volatility strategies.

Focus on profit opportunities:

• Because the interest rate spread is already very narrow, funds are being shifted from high-yield bonds to investment-grade bonds.
• Increase investment in emerging market hard currency corporate bonds and local currency bonds to capture interest rate spreads and yields with low correlation to equities.
• Utilize infrastructure and volatility strategies as sources of income to hedge against inflation.

Using Asia as the core of diversity:

• Overweight in China, Hong Kong, Japan, Singapore, and South Korea.
• Topics of interest: Asia's data center boom, China's leading innovative companies, improved returns for Asian companies through buybacks/dividends/mergers and acquisitions, and high-quality Asian credit bonds.

Regarding fixed income, they are clearly optimistic:

• Global investment-grade corporate bonds offer higher spreads and the opportunity to lock in yields before policy rates fall.
• Overweight emerging market local currency bonds to capture interest rate spreads, potential currency gains, and low correlation with equities.
• Slightly underweight global high-yield bonds due to their high valuations and some credit risks.

This is a textbook example of a "late-cycle but not yet over" portfolio allocation: go with the flow, diversify your investments, and let Asia, AI, and yield strategies drive your portfolio.

I believe this strategy will be largely correct over the next 6-12 months. But the problem is that most macroeconomic analyses stop here, while the real risks begin from here.

2. Cracks beneath the surface

From a macro perspective:

• US nominal spending growth is around 4-5%, directly supporting corporate revenue.
• But the key question is: Who is consuming? Where does the money come from?

Simply discussing a declining savings rate ("consumers have no money") misses the point. If wealthy households draw on their savings, increase credit, and realize asset gains, they can continue to consume even with slowing wage growth and a weak job market. Consumption exceeding income is supported by the balance sheet (wealth), not the income statement (current income).

This means that a large portion of marginal demand comes from wealthy households with large balance sheets, rather than from broad-based real income growth.

This is why the data looks so contradictory:

• Overall consumption remained strong.
• The labor market is gradually weakening, especially for low-end jobs.
• Income and asset inequality has intensified, further reinforcing this pattern.

Here, I depart from the mainstream narrative of "resilience." Macroeconomic aggregates look good because they are increasingly dominated by a small group at the top of the income, wealth, and capital acquisition levels.

This remains a positive for the stock market (profits don't care whether the income comes from one rich person or ten poor people). But for social stability, the political environment, and long-term growth, it's a slowly escalating threat.

3. The Stimulating Effect of AI Capital Expenditure

The most underestimated dynamic at present is artificial intelligence capital expenditure and its impact on profits.

In short:

• Investment expenditures are the income of others today.
• The associated costs (depreciation) will be reflected slowly over the next few years.

Therefore, when AI hyperscale enterprises and related companies significantly increase their total investment (e.g., by 20%):

• Revenue and profits will receive a huge and immediate boost.
• Depreciation increases slowly over time, roughly in sync with inflation.
• Data shows that the best single indicator for explaining profits at any given time is total investment minus capital consumption (depreciation).

This leads to a very simple, yet contrary-to-consensus, conclusion: during the ongoing wave of AI capital expenditure, it stimulates the business cycle and maximizes corporate profitability.

Do not try to block this train.

This aligns perfectly with HSBC's overweighting of technology stocks and its theme of "evolving AI ecosystem." They are essentially laying the groundwork for the same profit logic in advance, albeit in a different way.

I am more skeptical of the narratives about its long-term impact:

I don't believe that AI capital expenditure alone can usher us into a new era of 6% real GDP growth.

Once a company's free cash flow financing window narrows and its balance sheet becomes saturated, capital expenditures will slow down.

As depreciation catches up, this "profit incentive" effect will fade; we will return to the underlying trend of population growth plus productivity gains, which is not particularly high in developed countries.

Therefore, my position is:

• Tactically: As long as total investment data continues to surge, remain optimistic about the beneficiaries of AI capital expenditure (chips, data center infrastructure, power grids, niche software, etc.).
• Strategically: view this as a cyclical profit boom, rather than a permanent reset of the trend growth rate.

4. Bonds, liquidity, and the transmission mechanism of semi-ineffectiveness

This part got a little weird.

Historically, a 500-basis-point interest rate hike would severely impact the private sector's net interest income. However, today, trillions of dollars in public debt lie as safe assets on private balance sheets, distorting this relationship:

• Rising interest rates mean higher interest income for holders of government bonds and reserves.
• Many businesses and households have fixed-rate debt (especially mortgages).
• Final result: The net interest burden of the private sector did not worsen as macroeconomic forecasts predicted.

Therefore, we face the following:

• A Federal Reserve caught in a dilemma: inflation remains above target, while labor market data is weakening.
• A volatile interest rate market: The best trading strategy this year is to buy bonds at the mean reversion rate, buy after panic selling, and sell after a rapid rise, because the macro environment remains unclear as to whether there will be a clear trend of "significant rate cuts" or "another rate hike".

Regarding "liquidity," my view is quite straightforward:

• The Federal Reserve's balance sheet now resembles a narrative tool; its net changes are too slow and too small relative to the entire financial system to serve as an effective trading signal.
• The real changes in liquidity occur on the balance sheets of the private sector and in the repurchase market: who is borrowing, who is lending, and at what interest rate spread.

5. Debt, Population, and China's Long-Term Shadow

Sovereign debt: The outcome is known, but the path is unknown.

The international sovereign debt problem is a decisive macroeconomic issue of our time, and everyone knows that the "solution" is nothing more than:

By devaluing the currency (inflation), the debt-to-GDP ratio can be brought back to a manageable level.

The path remains undecided:

Orderly financial repression:

• Maintain a nominal growth rate > nominal interest rate.
• Tolerating inflation slightly above target,
• Slowly eroding the actual debt burden.

Chaotic crisis events:

• Markets panicked due to the out-of-control fiscal trajectory.
• The term premium suddenly surged.
• A currency crisis occurs in a weaker sovereign nation.

Earlier this year, we already experienced this when market concerns about fiscal policy caused yields on long-term U.S. Treasury bonds to surge. HSBC itself noted that the narrative of a "deteriorating fiscal trajectory" peaked during budget discussions and subsequently subsided as the Federal Reserve shifted its focus to growing concerns.

I believe this drama is far from over.

Fertility Rate: A Slow-Moving Macroeconomic Crisis

The global fertility rate has fallen below replacement level, a problem not only in Europe and East Asia, but now also spreading to Iran, Turkey, and gradually affecting parts of Africa. This is essentially a far-reaching macroeconomic shock masked by demographic figures.

Low birth rate means:

• A higher dependency ratio (an increase in the proportion of people in need of support).
• Lower long-term real economic growth potential.
• The long-term social distribution pressure and political tension caused by the fact that capital returns have consistently exceeded wage growth.

When you combine AI capital expenditure (a shock of capital deepening) with declining fertility rates (a shock of labor supply),

You will get a world like this:

• The capital owners nominally performed exceptionally well.
• The political system has become more unstable.
• Monetary policy is caught in a dilemma: it must support growth while avoiding inflation that could trigger a wage-price spiral when labor finally gains bargaining power.

This will never appear in an institution's 12-month outlook slides, but it is absolutely crucial for an asset allocation perspective of 5-15 years.

China: A Key Variable That Has Been Overlooked

HSBC's view on Asia is optimistic: it is bullish on policy-driven innovation, the potential of AI and cloud computing, governance reforms, higher corporate returns, low valuations, and the tailwinds brought by widespread interest rate cuts across Asia.

My opinion is:

• From a 5-10 year perspective, the risk of having no allocation to the Chinese and North Asian markets is greater than the risk of having moderate allocation.
• From a 1-3 year perspective, the main risks are not macroeconomic fundamentals, but rather policies and geopolitics (sanctions, export controls, and capital flow restrictions).

You could consider allocating assets related to Chinese AI, semiconductors, and data center infrastructure, as well as high-dividend, high-quality credit bonds. However, you must determine the allocation size based on a clear policy risk budget, rather than simply relying on historical Sharpe ratios.