Bentham says AI euphoria, tariff shockwaves and policy paralysis will shape the road to 2026

Richard Quin

The next 18 months will be shaped by the collision of tariff-driven economic slowdowns, volatile inflation dynamics and an extraordinary surge in artificial intelligence investment   reshaping capital markets at unprecedented speed, according to Bentham Asset Management CIO Richard Quin.

Quin said, “Looking at the recent market performance, the past year has been a good time to be in bonds, with fixed income outperforming cash and many parts of the credit market generating excess returns despite pockets of weakness in high-yield and CLOs.”

“However, markets now face a totally different tariff environment compared with expectations at the start of the year. Our calculation puts the average tariff rate at around 18 percent,” he said. “That is almost double what the market was expecting. It’s a huge policy shift, and it’s already having knock-on effects, with less activity in the U.S., weaker non-farm payrolls and a steady drift lower in labour indicators.”

The recent U.S. government shutdown, the longest in history, compounded the challenge by choking the flow of economic data.

“The breadth and length of the shutdown was extraordinary,” Quin said. “This one impacted six weeks of salaries for 1.4 million federal workers. Confidence dropped sharply, and the Federal Reserve is now operating with far less information than it would normally have.

“The resulting data vacuum could distort the path of interest rates. The Fed may be hesitant to cut because it simply doesn’t know how bad or how good things are. Inflation is trending a little higher, and some numbers are stronger than expected, others are weaker. We’re navigating in fog.”

Quin contrasted this with China, which he described as continuing to “export deflation” to the world economy. “They have excess capacity and low domestic demand, and they are exporting loss-making goods,” he said.

If U.S. politics is creating volatility, artificial intelligence is creating transformation, he noted.

“The biggest force in markets right now is AI revolution,” he said. “But what concerns us is the scale of capital flowing into AI investment. According to JP Morgan, the world is about to spend five trillion dollars supersizing AI. We’ve already seen Meta come to market with a 30-billion-dollar issue that traded down. That is not normal.”

Looking ahead to late 2025 and into 2026, Quin said, “There’s a narrative that everything AI-related is good and everything old-economy is bad. I’m not convinced that’s the right way to think about it. AI could create zombies out of some companies by shifting cost curves so dramatically that established companies simply can’t compete.

“We expect the monetary easing cycle to end soon in several major economies. We still expect to see multiple cuts in the US and the UK. But fiscal policy in many countries are so stretched that new fiscal discipline is going to become pro-cyclical and not helpful in a downturn. That means some economies could face more pain before things improve.”

“Inflation, will remain choppy and unpredictable with AI only adding to the uncertainty.”

“The risks in AI build-out and comparison with dot-com cycle are real and this capital cycle could be brutal and lead to binary outcomes. Welcome back to Schumpeter creative destruction.”

“We have responded by dialling risk back and increasing exposure to defensive assets. We’ve reduced our riskier credit positions and added to government bonds and agencies, and these are paying well above swap curves and well above treasuries. We still favour Australian bonds but have trimmed exposure, getting diversification from UK and US bonds.

“Overall, there’s risk in underpriced leverage. There are refinancing risks, and policy changes will create casualties. We want to be positioned for that.

“Our returns have been positive across the board,” he said. “We’ve kept up with the bond market rally and in some cases outperformed. We are pleased with the longer-term figures. Over five years, we’ve produced very competitive returns relative to both fixed interest and credit markets.”