Bullish on risk assets in a fractured world

Written by: @arndxt_xo

Translated by: AididiaoJP, Foresight News

In short: I am bullish on risk assets in the short term, due to AI capital expenditures, consumption driven by the wealthy, and still relatively high nominal growth—all structurally favorable for corporate earnings.

Put simply: when the cost of borrowing money drops, “risk assets” typically perform well.

Meanwhile, I am deeply skeptical of the prevailing narrative about what all this means for the next decade:

• The sovereign debt problem cannot be solved without some combination of inflation, financial repression, or unexpected events.
• Fertility rates and demographics will quietly constrain real economic growth and amplify political risk.
• Asia, especially China, will increasingly become the core driver of both opportunity and tail risk.

So the trend continues—keep holding those profit engines. But constructing a portfolio requires recognizing that the road to currency devaluation and demographic adjustment will be bumpy, not smooth sailing.

The Illusion of Consensus

If you only read the views of major institutions, you’d think we’re living in the most perfect macro world:

Economic growth is “resilient,” inflation is gliding toward target, AI is a long-term tailwind, and Asia is the new engine of diversification.

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

I actually partially agree with this view. But if you stop here, you’ll miss the real story.

Beneath the surface, the reality is:

• An earnings cycle driven by AI capex, far stronger than most realize.
• A monetary policy transmission mechanism partially broken by massive public debt sitting on private balance sheets.
• Structural ticking time bombs—sovereign debt, collapsing fertility, geopolitical realignment—that may not matter this quarter, but are critical for what “risk assets” will mean a decade from now.

This article is my attempt to reconcile these two worlds: the shiny, marketable story of “resilience,” and the messy, path-dependent macro reality.

1. Market Consensus

Let’s start with the prevailing view among institutional investors.

Their logic is simple:

• The equity bull market continues, but with increased volatility.
• Diversify sector exposure: overweight tech and communications, but also allocate to utilities (power demand), industrials, and financials for value and diversification.
• Use alternatives and multi-asset strategies to hedge downturns—such as gold, hedge funds, private credit/equity, infrastructure, and volatility strategies.

Key yield opportunities:

• With spreads now narrow, rotate from high-yield to investment-grade bonds.
• Increase allocations to emerging market hard currency corporates and local currency bonds for spread and low equity correlation.
• Use infrastructure and volatility strategies as inflation-hedged income sources.

Asia as the core of diversification:

Overweight China, Hong Kong, Japan, Singapore, and Korea.

Focus on themes: the Asian data center boom, China’s leading innovators, rising Asian corporate returns via buybacks/dividends/M&A, and high-quality Asian credit.

On fixed income, they are clear:

• Global investment-grade corporates, for their higher spreads and the opportunity to lock in yields before policy rates drop.
• Overweight EM local currency bonds for spread, potential FX gains, and low equity correlation.
• Slight underweight to global high-yield bonds, due to high valuations and specific credit risks.
• This is textbook “late-cycle but not over” positioning: go with the flow, diversify, let Asia, AI, and yield strategies drive your portfolio.

I think this strategy is broadly correct for the next 6–12 months. But the problem is that most macro analysis stops here, and the real risks only start from this point.

2. Cracks Beneath the Surface

Macro view:

US nominal spending growth is around 4–5%, directly supporting corporate revenues.

But the key is: who is spending? Where does the money come from?

Simply discussing falling savings rates (“consumers are broke”) misses the point. If wealthy households draw on deposits, increase credit, or realize asset gains, they can keep spending even if wage growth slows and the job market softens. The part of consumption that exceeds income is supported by the balance sheet (wealth), not the income statement (current income).

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

That’s why the data looks so contradictory:

• Aggregate consumption remains strong.
• The labor market is gradually weakening, especially in lower-end jobs.
• Income and asset inequality is worsening, reinforcing this pattern further.

Here, I diverge from the mainstream “resilience” narrative. Macro aggregates look fine because they’re increasingly dominated by the top of the distribution in income, wealth, and access to capital.

For the stock market, this is still bullish (profits don’t care if the revenue comes from one rich person or ten poor people). But for social stability, the political environment, and long-term growth, this is a slow-burning risk.

3. The Stimulus Effect of AI Capex

The most underestimated dynamic right now is AI capital expenditure and its impact on profits.

Simply put:

• Investment spending is someone else’s income today.
• The associated costs (depreciation) show up slowly over the next several years.

So when AI hyperscalers and related companies massively ramp up capex (say, up 20%):

• Revenues and profits get a huge and front-loaded boost.
• Depreciation rises slowly over time, roughly in line with inflation.
• Data shows that, at any given point, the best single predictor of profits is gross investment minus capital consumption (depreciation).

This leads to a very simple but consensus-defying conclusion: as long as the AI capex boom continues, it acts as a stimulus to the business cycle and maximizes corporate profits.

Don’t try to stop this train.

This aligns perfectly with HSBC’s overweight on tech stocks and its “evolving AI ecosystem” theme—they’re essentially positioning for the same profit logic, albeit with different wording.

What I’m more skeptical of is the narrative around its long-term impact:

• I don’t believe AI capex alone will take us into a new era of 6% real GDP growth.
• Once the window for free cash flow financing narrows and balance sheets get saturated, capex will slow down.

As depreciation catches up, the “profit stimulus” fades; we revert to the underlying trend of population growth + productivity gains, which isn’t high in developed countries.

So my view is:

• Tactically: Stay bullish on AI capex beneficiaries (chips, data center infrastructure, grid, niche software, etc.) as long as gross investment continues to surge.
• Strategically: Treat this as a cyclical earnings boom, not a permanent reset of trend growth rates.

4. Bonds, Liquidity, and a Half-Broken Transmission Mechanism

This part gets a bit weird.

Historically, a 500 basis point rate hike would hammer the private sector’s net interest income. But today, trillions in public debt sit on private balance sheets as safe assets, distorting the relationship:

Rising rates mean bondholders and reserve holders get more interest income.

Many corporate and household debts are fixed-rate (especially mortgages).

The end result: the net interest burden on the private sector hasn’t deteriorated as much as macro models would predict.

So now we face:

• A Fed caught in a bind: inflation is still above target, but labor data is softening.
• A highly volatile rates market: the best trade this year has been mean-reverting bonds—buy after panic selling, sell after sharp rallies—since macro conditions never clarify into a clean “big cuts” or “hike again” trend.

On “liquidity,” my view is straightforward:

The Fed’s balance sheet now functions more as a narrative tool; its net changes are too slow and small relative to the whole financial system to serve as an effective trading signal.

True liquidity changes happen in private sector balance sheets and the repo market: who is borrowing, who is lending, and at what spread.

5. Debt and Demographics

Sovereign Debt: Known Endgame, Unknown Path

Global sovereign debt is the defining macro issue of our era, and everyone knows the “solution” is:

Use currency depreciation (inflation) to push the debt/GDP ratio back to manageable levels.

What’s unresolved is the path:

Orderly financial repression:

Keep nominal growth > nominal rates,

Tolerate inflation somewhat above target,

Slowly erode the real debt burden.

Chaotic crisis events:

• Markets panic over fiscal trajectory.
• Term premia suddenly surge.
• Weaker sovereigns face currency crises.

Earlier this year, when US long-term bond yields spiked on fiscal worries, we got a taste of this. HSBC itself noted that the “fiscal trajectory deterioration” narrative peaked during budget talks, then faded as the Fed shifted focus to growth concerns.

I believe this play is far from over.

Fertility: The Slow-Motion Macro Crisis

Global fertility rates have fallen below replacement, not just in Europe and East Asia, but now Iran, Turkey, and gradually even parts of Africa. This is a profound macro shock, masked by population statistics.

Low fertility means:

• Higher dependency ratios (more people to support per worker).
• Lower long-term potential real economic growth.

Ongoing social distribution pressure and political tension as returns to capital outpace wage growth over the long run.

If you combine AI capex (a capital-deepening shock) with declining fertility (a labor supply shock),

You get a world where:

• Owners of capital look excellent on paper.
• Political systems become more unstable.

Monetary policy faces a dilemma: support growth, but avoid a wage-price spiral if labor eventually gains bargaining power.

You’ll never see this on an institution’s 12-month outlook slide, but for a 5–15 year asset allocation horizon, it’s absolutely critical.

China: The Overlooked Key Variable

HSBC’s Asia outlook is optimistic: positive on policy-driven innovation, AI/cloud potential, governance reform, rising corporate returns, low valuations, and the tailwind from rate cuts across the region.

My view is:

• Over a 5–10 year horizon, the risk of zero exposure to China and North Asia is higher than the risk of moderate exposure.
• Over the next 1–3 years, the main risks are not macro fundamentals, but policy and geopolitics (sanctions, export controls, capital restrictions).

Consider allocating to China AI, semiconductors, data center infrastructure, and high-dividend, high-quality credit assets—but you must size these exposures based on explicit policy risk budgets, not just historical Sharpe ratios.