Mike Gitlin

Capital Group, one of the world’s largest and leading active investment managers¹, today announces plans to establish its first office in the Middle East, in the UAE’s Abu Dhabi Global Market (ADGM). The firm expects the Abu Dhabi office to formally open later this year, subject to regulatory approvals.

This is a landmark step in Capital Group’s long-term strategy to accelerate growth globally. It reflects the firm’s conviction in the Middle East Region, the UAE and Abu Dhabi as a rapidly evolving and strong financial ecosystem, supported by Abu Dhabi Investment Office (ADIO).

The planned Abu Dhabi location will be Capital Group’s 35th office worldwide, reflecting the firm’s consistent approach to establishing local capabilities that are closely connected to its global platform. As in other markets, the intent is to build steadily over time, aligned with client needs and Capital Group’s long-term investment culture. 

H.E. Ahmed Jasim Al Zaabi, Chairman of Abu Dhabi Global Market (ADGM), said, “We are pleased to welcome Capital Group to ADGM as more leading global financial institutions choose Abu Dhabi as the base for their long-term regional expansion. Their decision underscores the value investors place on regulatory certainty, strong institutions and a stable environment for sustainable growth. With a robust legal framework and access to deep, long-term capital, ADGM is built to support global firms operating at scale. Capital Group’s presence further strengthens Abu Dhabi’s role as a bridge between international capital and regional opportunity, and as a place where enduring partnerships are formed with confidence.”

Mike Gitlin, President and CEO of Capital Group said, “We take a long-term and deliberate approach to building our global footprint, and we move only when we have high conviction. This is one of those moments. Establishing a presence in Abu Dhabi demonstrates our commitment to being closer to our business partners across the Middle East as well as our intent to explore further investments in this dynamic region.”

Capital Group is relocating Benno Klingenberg-Timm, Head of Institutional for Europe and Asia, to take on the additional responsibility of head of its Abu Dhabi office. Klingenberg-Timm commented, “The UAE has established itself as a leading global financial centre, reflecting the strong growth dynamics of the Gulf Cooperation Council (GCC) and the broader region. The Middle East is important both as a market in its own right and as a natural gateway connecting Europe, Asia and Africa.”

Capital Group’s expansion into Abu Dhabi reflects ADIO’s commitment to create a future-facing financial services ecosystem led by ADIO’s FinTech, Insurance, Digital and Alternative Assets (FIDA) platform.

Fatima Al Hamadi, Head of the FIDA Cluster, said: “Through the FIDA cluster, ADIO is building an integrated financial ecosystem that brings together innovative solutions, digital capabilities and advanced regulatory frameworks, reinforcing Abu Dhabi’s position as a leading global financial centre. Capital Group’s expansion in Abu Dhabi reflects the strength and attractiveness of the emirate’s ecosystem for global institutions with long-term ambitions. It also underscores our commitment to enabling strategic investments and enhancing integration across global markets, contributing to sustainable growth and a future-ready economy.”

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Notes:
[1] Data as of 31 December 2025. Source: Capital Group.

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The primary challenge for investors is less about the direction of growth and more about its durability.

Positive growth but with rising fragility

Key takeaways

• Global growth remains positive, but increasingly fragile. A narrow set of drivers is supporting activity, increasing sensitivity to shocks and widening the range of potential outcomes.
• US growth is supported by AI investment, but durability is uncertain. Productivity gains have yet to translate meaningfully beyond corporate margins.
• Tariffs, energy and geopolitics add a layer of uncertainty. Outside of the US, cost pressures are more likely to lift inflation and weigh on growth, complicating policy trade-offs.
• Wider dispersion places a premium on portfolio resilience over forecasts. Elevated uncertainty argues against concentrated macro positions and in favour of flexibility as conditions evolve.

Summary: Bigger tails and a shrinking middle

At this spring’s Portfolio Strategy Group (PSG) forum, Capital Group’s fixed income investment experts examined the global macroeconomic landscape with a focus on mounting uncertainties and growing divergence. US economic growth over the past six months has been more resilient than anticipated at our last PSG. As we look ahead, data points to growth remaining positive but becoming increasingly fragile, with the conflict in Iran adding extra uncertainty.

US economic expansion is positive overall, but its composition is increasingly fragile, with AI investment representing a significant proportion of GDP. In the long term, AI has the potential to provide a huge productivity boost to the US economy, but the current influence of AI capex on GDP raises the risk that adverse shocks may quickly lead to weaker demand, heightened volatility, and greater dispersion, rather than a smooth cyclical adjustment.

Beyond the US, momentum has improved in parts of the global economy, especially the euro area, where growth is aided by fiscal stimulus and cyclical recovery. Nevertheless, this improvement remains at risk and is more vulnerable to policy constraints and external shocks such as higher energy prices and tariffs.

Trade policy changes and the Iran conflict are the two most recent examples of exogenous shocks that add uncertainty to the broader economic environment. Both have skewed risks toward more stagflationary outcomes. In this context, the primary challenge for investors is less about the direction of growth and more about its durability: what is the long-term impact from AI infrastructure? Composition: is growth being driven by AI investment or consumption? Distribution: what does the K-shaped economy mean for growth?

Portfolio positioning

Given the distribution of outcomes is wide with higher probability of tail events (AI productivity boost and stagflationary risk), we think it is prudent to avoid positioning portfolios for one macroeconomic outcome.

Guidance is therefore structured as a cautious balance between carry, diversification and downside risk management, with portfolios retaining the ability to add risk should valuations become more attractive due to volatility. More details will be provided at the end of this note but in summary, PSG guidance currently favours:

• Overweight duration in portfolios mainly through the US, while being underweight euro and UK.
• Maintain a steepening position.
• Remain very selective in credit markets, with a focus on securitised credit and opportunities in investment grade and high yield corporates.

1. AI driven growth is powerful but narrow

US growth remains positive, supported by large AI-related investments that continue to drive capital spending and productivity. The first chart on the following page puts current AI-related spending into some historical perspective. As a percentage of GDP, technology spending in the US is now well above the peak in the 1990s tech bubble, and as the second highlights, the majority of this is concentrated in a very small group of companies.

Although it is huge, companies view this spending as strategically essential from a corporate perspective because AI underwrites their platform relevance, control and future value chains, and the capacity to compete in the AI era. Put simply, the cost of not investing is deemed far greater than the near-term risk to return on investment.

This level of spending is significant because at this level, it represents around 1% of US GDP. From a cyclical perspective, this matters because it provides a meaningful offset to weaker momentum elsewhere in the economy. Growth can therefore remain resilient even if non‑AI sectors expand only modestly.

However, the composition of this spending limits its broader economic impact. Much of the investment is directed toward data centres and associated infrastructure, with a high import content and limited ongoing labour requirements once facilities are operational. As a result, the multiplier into employment and household income is relatively small.

While this spending currently supports US growth, it has also heightened the economy’s reliance on ongoing AI investment. And, importantly, with spending focused on a small number of companies, aggregate capex is clearly sensitive to changes in capital discipline at firm level. At the moment, this spending remains strategically important for the hyperscalers, with its durability shaped primarily by access to power, planning and grid connection constraints, and hardware availability. Any change that suggests companies ought to scale back spending would have a negative impact on overall economic growth.

Are we already seeing AI productivity gains or just a cyclical bounce?

The broader significance of this capex cycle is its link to productivity, which surged in the US to an annualised pace of around 5% in the middle of last year. This unusual, though not unprecedented, pace of growth raises the question of whether the upturn was cyclical, reflecting an improving economy, or structural, marking the early stages of AI driven productivity gains.

The cyclical argument is that as growth accelerated, firms increased the utilisation of existing labour and capital rather than hiring, allowing productivity to act as a shock absorber. An alternative view is structural: that the upturn reflects the early impact of AI adoption, with efficiency gains initially concentrated and broader diffusion still to come.

This distinction is important for the overall outlook. If the 2025 surge was largely cyclical, productivity is likely to normalise as growth moderates; if structural, and therefore sustainable, it raises the prospect of higher potential growth. The key question then becomes how these productivity gains are transmitted through the economy. Do they accrue to workers or to firms? The macro implications differ materially, with growth likely more durable if productivity gains are passed to workers rather than retained primarily in corporate margins. At this stage, the data is not conclusive.

2. Labour market is softening in a ‘K shaped’ economy

The current surge in AI capex spending is helping to mask weakness across other parts of the economy. From a cyclical perspective, the labour market is emerging as a key fault line, sharpened by the debate about the durability of recent productivity gains. Although the overall unemployment rate remains low, there are signs of underlying softness.

First, US job growth has become increasingly concentrated in few areas such as the healthcare/education, leisure and government sectors. For example, January payroll growth was almost entirely driven by healthcare and social assistance, which together accounted for the vast majority of the 130,000 jobs created. Even after a strike-related pullback in February, healthcare remains the dominant contributor to employment growth in 2026. Outside of these sectors, job growth has been weak, underscoring the narrow and potentially fragile nature of US labour market resilience, although we acknowledge this trend has persisted since 2023 and growth has been fine.

Second, in addition to this concentration risk, there are some broader signs of a softening in the US labour market. One place we can observe this is the JOLTS quit rate and wage data, which both continue to fall. This may reflect increasing worker caution as bargaining power weakens, potentially because recent productivity gains have accrued more to firms than to labour.

A degree of caution is also evident at corporate level, with companies retaining muscle memory of the difficulties in rehiring in the post-COVID era, preferring to implement hiring freezes rather than reducing headcount and creating a so called low-hire low-fire labour market. This data is more representative of lower income, less secure workers, who are more reliant on job switching and nominal wage growth, than higher-income cohorts.

Labour weakness in this cohort at the same time that overall unemployment remains low points toward the current ‘K shaped’ dynamic of the US economy. That is, the idea that low/middle income workers face more pressure on household budgets compared to their richer counterparts. This stress is also showing up in rising delinquencies among lower-income households.

The divergence matters because consumption accounts for roughly two-thirds of US GDP, according to the Bureau of Economic Analysis. At the same time, income is highly concentrated, with households in the top 20% receiving just over half of total US personal income. As a result, economic growth can remain resilient even as labour market stress intensifies for lower-income households, whose aggregate consumption is smaller.

The K-shaped economy dynamic is reinforced at firm level. Smaller companies that typically have less pricing power and greater exposure to tariffs face more pressure on margins than large counterparts. This, in turn, feeds through to wages and job security for workers in such enterprises.

For the economy as a whole, this means spending growth for these lower income households is lagging, with aggregate spending largely supported by high-income groups, which benefit from asset prices and stable employment. However, as the breadth of consumption narrows, US growth potentially becomes more fragile and exposed to the risk of a further weakening of the labour market.

This brings the sustainability of the recent productivity growth question into focus. In the near term, AI‑related investment continues to provide important cyclical support to growth, acting as stabiliser for the cycle and helping offset labour market softening and sustain aggregate activity even as hiring and wage momentum cool.

If the productivity upturn seen in 2025 was largely cyclical, then it could normalise as the labour market continues to soften, leaving the economy more exposed to further weakness in hiring and household income growth. However, the most important question is the transmission channel of productivity gains into the broad economy in the long term.

3. Productivity and fiscal policy are the main factors to shape medium-term outcomes…

The durability of the current growth mix ultimately depends on productivity, particularly in the US. If productivity gains prove more persistent, the key issue becomes transmission: whether those gains begin to show up more clearly through wages and lower inflation that supports real incomes over time or remain in corporate margins. If gains increasingly accrue to workers, we can anticipate this would contribute to higher levels of growth and a disinflationary environment alongside lower unit labour costs. But the jury is still out as there are many factors that contribute to this trend, including a potentially weaker USD in the long term, which can put more pressure on inflation.

Elsewhere, medium-term economic outcomes increasingly hinge on whether policy can offset fragile growth dynamics, with fiscal developments playing a prominent role. Fiscal policy is providing support most clearly in Europe, where it is driven by the unusually large German fiscal impulse, which supports growth both cyclically and secularly despite recent shock-driven uncertainty. German government plans imply wider deficits by around 2-3% of GDP over the course of the parliamentary term relative to previous plans. It is worth reiterating just how significant this amount of stimulus is. On an IMF measure excluding interest payments, the planned spending amounts to a cumulative fiscal impulse of roughly 10% of German GDP over four years, larger than during reunification in the 1990s. There is some uncertainty around the timing and near-term transmission of this support, however, particularly given energy related headwinds.

That said, elements of the stimulus are beginning to appear in the data. The German economy exceeded expectations with annualised growth of 1.2% in the fourth quarter, while domestic manufacturing new orders have strengthened and survey indicators such as PMI (Purchasing Managers’ Index) have improved. However, companies are not yet reporting clear evidence of the stimulus feeding through to order books. Expectations are more cautious, with much of the impact anticipated later in the cycle.

Elsewhere, China could provide further incremental fiscal support. Credit data, which has historically been a strong leading indicator, continues to point to subdued growth and little sign of re‑acceleration. Our economists judge that, if this persists, it could prompt additional fiscal stimulus later in the year.

4. … But energy shocks and tariffs add a layer of uncertainty

Energy shocks and trade policies are amplifying regional dispersion in growth, inflation, and monetary policy, making the global macro environment more uncertain. The Iran conflict is the latest example of this. Even if the conflict proves relatively short lived, its impact on energy markets could linger through higher risk premia and capacity destruction during the conflict. That persistence matters for regions with higher energy sensitivity, where inflation pressures are more easily transmitted into domestic prices and real incomes.

Outside the US, rising energy prices challenge Europe’s growth recovery. Alongside the UK, parts of Asia and several emerging markets, the eurozone’s high energy dependence raises the risk that heightened energy prices lead to a less favourable trade off between growth and inflation.

Tariffs add a further layer of divergence and uncertainty to the macro picture. In Europe and Asia, their inflationary impact is less easily absorbed by margins than in the US and therefore more likely to feed through to consumer prices. At the same time, trade frictions weigh on external demand and corporate confidence, reinforcing any cyclical slowdown. The result is a macro environment in which inflation risks remain skewed to the upside even as activity softens due to continued supply shocks.

Whether higher headline inflation as a result of these factors leads to rate hikes depends on the persistence of the inflation shock, the extent of the damage to growth and if there is any fiscal support. Although the situation remains in flux, expectations for central banks around the world have shifted towards a higher probability of rate hikes, with the European Central Bank (ECB) and Bank of England (BoE) the most hawkish. However, it is important to remember this is very different environment from 2022 where the demand side was stronger and starting yields very low. Central banks will need to balance the risk of higher inflation against the impact on growth of aggressive tightening.

By contrast, the US Federal Reserve may still retain greater flexibility than its peers. The US economy is less sensitive to energy price shocks, and the Fed’s dual mandate allows it to place greater weight on labour market outcomes if downside risks emerge. As long as core inflation remains contained, a cooling labour market would give the Fed more scope to ease policy than central banks in regions where inflation pass-through is stronger.

Investment implications

Overall, the PSG view is that global economic growth remains positive and this continues to support selective exposure to credit, while acknowledging valuations remain relatively tight. However, the narrow and increasingly fragile nature of this growth argues against aggressive directional positioning. Therefore, rather than positioning for a single macro outcome, portfolio construction should emphasise balance across risk drivers, focus on bottom-up security selection, and preserve flexibility as uncertainty remains elevated.

In rates, the focus is on downside protection rather than expressing a high conviction growth view.

• US rates: US rates have moved higher without a meaningful change in outlook. The PSG believes that given its dual mandate, if core inflation stays stable, the Fed will likely focus on labour market weakness and favour lower rates, despite higher energy prices also given the lower energy sensitivity in the US.
• Global Rates ex-US: Improving growth trajectories, stickier inflation and increased deficit spending support an underweight position to Europe and UK rates.
• Curve: Curve steepeners through an overweight in the 2-5yrs part of the curve in the US and an underweight of the 10yr rates continue to offer the potential to provide protection against asymmetric outcomes where growth weakens but inflation risks remain present. In Europe, we position for a steepening of the curve as well although we have a more neutral view on the front end given the potential hawkish stance of the ECB and BoE.

In credit, elevated yields continue to support expected returns, but tight valuations and rising dispersion place a premium on issuer-level analysis.

• High yield: Long-term improvements in credit quality and shorter duration of the market continue to support a structural role for high yield, though positioning should be measured and focused on resilience.
• Investment grade (IG): Softening fundamentals, albeit from a healthy starting point, and higher issuance suggest a more cautious approach alongside still tight valuations. However, overall yields remain elevated for such a high-quality asset class, prompting us to keep a strategic allocation to IG corporates. Security selection rather than broad beta exposure is crucial also given the recent increase in dispersion
• Agency Mortgage-Backed Securities: While technicals remain supportive of agency MBS, valuations are tight relative to historical levels and interest rates volatility elevated arguing for caution toward the asset class at current valuations.
• Structured credit: Provides a high-quality, shorter-duration source of carry and remains attractive relative to other spread sectors. This is an area where we see more value although we continue to focus on senior part of the capital structure as capital structures remain still relatively compressed.

Emerging markets (EM): The Iran conflict is expected to increase dispersion across EM rather than threaten the asset class overall, with many emerging economies benefitting from stronger macroeconomic foundations than in previous geopolitical crisis. Opportunities are focused on local currency markets where yields are elevated, inflation is tempered and curves are steep.

Nonetheless, FX resilience remains uneven across EM, underscoring the importance of security selectivity. On the other hand, the hard currency part of EMD remains uninspiring as spreads do not fully reflect broad uncertainty, although idiosyncratic opportunities remain.

FX: Potential USD weakness and monetary policy divergence suggests an underweight to the dollar versus developed market and select emerging markets currencies. However, the level of convictions has been reduced as the continuation of the Iran conflict could be supportive of the USD in the short term.

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Iran conflict

At the time of writing, the duration and ultimate resolution of the conflict in Iran remains unclear. While both sides appear prepared militarily for an extended conflict, there is sharp divergence between their political tolerance for an extended war. Although the US has superior military capability, we think it has limited tolerance for a protracted war. The Iranian regime, by contrast, sees the conflict as existential, and so likely has a higher tolerance to maintain the war over the longer term. This divergence makes a swift ending to the war more challenging, with a risk that this becomes a battle of endurance. A long conflict is expected to increase dispersion across regions, sectors, and countries. Outcomes would increasingly depend on underlying fundamentals, policy credibility, external balances and fiscal resilience

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Disclaimer: Risk factors you should consider before investing:
– This material is not intended to provide investment advice or be considered a personal recommendation.
– The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
– Past results are not a guarantee of future results.
– If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
– Depending on the strategy, risks may be associated with investing in fixed income, derivatives, emerging markets, sustainability-related investments and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.
Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates. This communication is intended for the internal and confidential use of the recipient and not for onward transmission to any other third party. This communication is of a general nature, and not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities. All information is as at the date indicated and attributed to Capital Group unless otherwise stated. While Capital Group uses reasonable efforts to obtain information from third-party sources that it believes to be accurate, this cannot be guaranteed. In Australia, this communication is issued by Capital Group Investment Management Limited (ACN 164 174 501 AFSL No. 443 118), a member of Capital Group, located at Suite 4201, Level 42 Gateway, 1 Macquarie Place, Sydney, NSW 2000 Australia. All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company. All other company names mentioned are the property of their respective companies. © 2026 Capital Group. All rights reserved.

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Where the gold price goes from here is a subject of vigorous debate.

With gold prices rising to record highs over the past three years, investors have increasingly turned their attention to this ancient store of wealth. What is driving the rapid increases, especially at a time when stocks and bonds have also generally done well?

The war in Iran halted gold’s rise for a time, as investors worried that higher oil prices might drive up inflation and thus lead to higher interest rates. Gold and interest rates have historically moved in opposite directions. But with the recent cease-fire agreement, volatile gold prices have stabilised in the range of $4,600 to $4,700 an ounce. While that is below the record high around $5,300 in January, it is still far above where it was when this remarkable rally began in early 2022 — when gold was trading below $1,800.

Where the price goes from here is a subject of vigorous debate. Was January the peak? Or does it have more room to run? And, regardless of its short-term direction, what role should gold play in a long-term investment portfolio? With those questions in mind, three Capital Group portfolio managers offer their views.

Gold prices are likely headed higher

Paul Benjamin, balanced portfolio manager

My outlook for gold prices is likely upward, but the magnitude will be determined by the level of real interest rates and real inflation-adjusted return from stocks and bonds. If you were to use a constant basket to define inflation, and you looked at real interest rates minus inflation, you would see that real rates have been very low since the global financial crisis. Gold tends to do well in those periods.

In addition, we had the freezing of Russian Treasury reserves in 2022, which caused central bank buying from non-Western central banks to accelerate dramatically. And then, interestingly, late last year we started seeing lots of news stories about the “debasement trade.” When people refer to the debasement trade, they are talking about fiscal concerns in many Western countries, including a lack of central bank independence and the risk that governments may need to inflate away their debt. I’d say those are the major issues that line up, driving gold and helping it accelerate in recent years.

In my view, gold has an important role in a portfolio, particularly in a balanced fund. I view it as an important diversifier. At Capital Group, we don’t buy physical gold or gold ETFs. Instead, I prefer to invest in companies that create value and can do better than if you had just owned gold. They are known as gold streamers: companies like Wheaton Precious Metals, Royal Gold and Franco Nevada. They are not miners. They are effectively finance companies. They make loans to copper miners or gold miners, and the loans are paid back in gold. All three companies have compounded their earnings per share 600 to 900 basis points a year faster than the increase in gold prices. And so they have done exactly what you would want. They have provided the traditional gold hedge while also contributing substantially to growth of capital.

Central banks have been the key to rising prices

Lisa Thompson, equity portfolio manager

Central banks are what I call price-insensitive buyers. They are not investing in gold to beat an index. They have an entirely different objective. They are trying to diversify their reserve base. They tend to be focused on risk and liquidity. When they adjust their asset allocation strategy, they do not care about the price. In my view, that has been the primary driver of gold prices over the past three years. It started with Russia and has extended to many other emerging markets, China being a notable example. But even in markets like Poland, you are starting to see this desire to diversify into gold and away from the US dollar.

It is difficult to speculate on motives but, obviously, the world is changing. They might be worried about the stability of fiat currency, or that we are moving into a multipolar world, or lots of other geopolitical issues. They are not necessarily dumping US Treasuries, but with their incremental reserves, they clearly are diversifying. Some are being more aggressive, some less. That is a totally different demand driver than anything we’ve seen in the past 30 years.

I think it’s a very important change. Will it last forever? No, of course not. But for now, there is just a structural demand for gold — and that is supporting gold prices. Keep in mind, near term, gold can be very volatile. It can move up and down sharply on a day-to-day basis. But I think we are seeing a different set of price parameters now than we were a few years ago.

Don’t be surprised if gold disappoints

Rob Lovelace, equity portfolio manager

Over time, gold provides normative to no creation in value. It’s a commodity that is primarily a store of wealth. In recent years, the largest buyers of gold have been central banks. However, prior to this buying activity, central banks for many decades had been divesting gold because it’s not a very useful asset. It doesn’t pay interest. It doesn’t compound. In fact, physical gold essentially has a tax on it because you have to bury it in a secure place and hire guards to protect it. So it actually has a negative income, especially at scale.

A few years ago, central banks were more interested in owning interest-bearing instruments, and the US dollar was seen as safe and secure. As confidence in the dollar has waned over the past few years, central bank gold buying has increased. I would attribute much of the current run in gold prices to this asset allocation decision that many central banks — almost entirely outside the US — have made to hold fewer dollars and more gold. At a certain point, they will have all the gold they need. They will no longer be buyers. And since there is a constant stream of new gold coming into the market from gold mines, at a rate of about 1% or 2% a year, you need to have a consistent, incremental buyer or the price will go down.

I have never used physical gold as an asset in my personal allocation mix, and I rarely use the indirect path of owning gold stocks or other gold-related investments in my portfolio. That said, throughout history, gold has served an important role as a store of wealth, as a currency, and as a hedge against inflation. In my view, gold

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Disclaimer: Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates. This communication is intended for the internal and confidential use of the recipient and not for onward transmission to any other third party. This communication is of a general nature, and not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities. All information is as at the date indicated and attributed to Capital Group unless otherwise stated. While Capital Group uses reasonable efforts to obtain information from third-party sources that it believes to be accurate, this cannot be guaranteed. In Australia, this communication is issued by Capital Group Investment Management Limited (ACN 164 174 501 AFSL No. 443 118), a member of Capital Group, located at Suite 4201, Level 42 Gateway, 1 Macquarie Place, Sydney, NSW 2000 Australia. All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company. All other company names mentioned are the property of their respective companies. © 2026 Capital Group. All rights reserved.

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Market volatility may distort the view, but history reminds investors to step back, stay diversified, and maintain a long-term perspective.

Fallout from the intensifying war in the Middle East has once again put market volatility in the spotlight. Oil prices have surged, sending the cost of gasoline higher and increasing the prospect of a global energy-induced economic slowdown. Since US and Israeli strikes on Iran began in late February, the S&P 500 Index has fallen about 2.3% through to 18 March. Meanwhile, the yield on the 10-year US Treasury, a cornerstone of the global financial system, has risen to 4.20% from 3.94% before the war, though it remains below where it began the year.

Should the worst oil supply shock in decades persist, investors may have doubts about their approach in such an uncertain environment. It is natural to seek safer shores when markets are choppy. But it is equally important to step back, gain perspective, and look beyond the horizon.

History shows the market has always recovered from previous declines. Here are five insights that can help investors regain confidence and stay invested for the long haul.

1. When in doubt, zoom out

Think back to early 2022. Russia’s invasion of Ukraine delivered a geopolitical shock that rattled markets and dominated headlines, much like today. Brent crude climbed nearly 30% to a high of $128 per barrel. At the same time, central banks led by the US Federal Reserve moved aggressively to raise interest rates, compounding uncertainty for investors already on edge.

How did stocks react? Fears that war and the fastest Fed rate hikes in decades would tip the global economy into a recession sent the S&P 500 Index down 19% in 2022. But the index staged a powerful rebound in 2023, gaining nearly 24% as inflation cooled, energy markets stabilised, and earnings proved more resilient than many investors expected. The episode serves as a reminder that markets often absorb shocks faster than headlines suggest.

Whether the market choppiness of early 2026 might give way to smoother sailing is impossible to know. But the upcoming midterm elections could steer the Trump administration to focus on more bread-and-butter issues that add economic optimism.

2. Markets typically have recovered quickly

Although markets declined during volatile periods, they often bounced back quickly. Indeed, stock market returns are typically stronger after sharp declines The average 12-month return from the S&P 500 immediately following a 15% or greater decline is 52%. That is why it’s usually best to remain calm and stay invested.

How often have S&P 500 corrections of 10% or more turned into entrenched bear markets? Turns out, not often. Instead, short periods of pullbacks ranging from 5% to 10% have been more common. While these may feel unsettling, a drop of 5% occurs on average twice per year while corrections of 10% or more happen every 18 months on average. And while intra-year declines are common, the good news is 38 of the last 50 calendar years have finished with positive returns.

What’s more, a selloff can create investment opportunities. For example, during the pandemic, investors punished a broad swathe of travel and leisure companies — including Royal Caribbean, which fell 83% from 20 January 2020 to 18 March 2020 — as lockdowns brought air travel, cruises and hotel bookings to a halt.

Certain travel and leisure stocks have since staged a dramatic recovery. Royal Caribbean returned 334% from the low to its peak price on 2 June 2021, as national vaccination rates and confidence grew. Identifying investment opportunities requires skill and experience, especially when markets are volatile. Bottom-up fundamental analysis may help investors balance short-term volatility with a longer-term perspective.

3. Bear markets have been relatively short-lived

A long-term focus can help investors put bear markets in perspective. Since 1949 there have been 11 periods of 20%-or-greater declines in the S&P 500. Although the average 33% decline during these cycles is painful to endure, missing out on the average bull market’s 265% return could be far worse.

Bear markets are typically shorter than bull markets, lasting an average of 12 months. While that can feel like an eternity, it pales in comparison to the average bull market, which lasts for 67 months — another reason that trying to time investment decisions is ill-advised.

Forecasting the start of the next recession is difficult. Many investors, for example, braced for a recession when the Federal Reserve raised rates in 2022 to combat sky-high inflation. Instead, the US economy grew, with markets posting double-digit gains in 2023, 2024, and 2025.

In the current environment, the closure of the Strait of Hormuz increases the risk of recession because of its significance as a vital passageway for one-fifth of the world’s oil. Higher energy costs could weigh on businesses and consumers, reducing the earnings potential for many companies. But the economy has surprised to the upside before, and it is too early to tell if widespread job losses, the hallmark of a recession, will occur.

4. Bonds can offer balance when it is needed most

In periods of slowing economic growth, bonds often shine brightest. In fact, it is the reason why high-quality bond funds are often the foundation of a classic 60% equities and 40% bonds portfolio. While the exact allocation may shift, a diversified portfolio is intended to generate attractive returns while minimising risk.

Bonds are known to zig when equity markets zag. That reaction could take time to play out as investors react to near-term dynamics before digesting the war’s risks to the overall economy. Currently, markets are focused on the potential inflationary shocks tied to a disruption in the world’s oil supply rather than the longer-term possibility of declining growth. The US may prove to be less sensitive to inflationary pressures from an energy price shock than other countries, giving the Fed room to respond to growth challenges that may arise from higher energy prices.

For its part, the Fed is likely to balance rate cuts with inflationary pressures from geopolitical uncertainties, so cuts may be slower to materialise absent a more pronounced economic downturn. Because yields are higher today following the Fed’s rate-hiking cycle in 2022, bonds have a higher income cushion to help absorb price volatility should rates rise.

Moreover, with bonds offering healthy income potential, investors may be able to take less risk with high-quality bonds while still meeting their return expectations.

5. Staying the course has paid off for long-term investors

When markets are volatile, it is hard to resist the urge to do something. Suggestions to stay the course offer little comfort when markets and emotions are spiraling. But in many cases, the best course of action has been none at all.

Beneath the unease are broader questions about the durability of our rules-based systems and geopolitical alliances that have anchored decades of relative economic stability. As globalisation continues to evolve, markets may be forced to contend more frequently with sudden disruptions.

Take the sweeping tariffs President Trump levied on nearly all major US trading partners in the spring of 2025. The S&P 500 Index plunged as much as 18.7% from its peak in February as investors feared the global economy would enter a deep downturn. Those worries later eased amid trade deals and continued economic resilience. By year’s end, the S&P 500 Index recovered and finished up 17.9%.

The lesson? Market declines can be painful but rather than trying to time the market, investors would be wise to stay the course. To weather market volatility, they should seek diversification across stocks and bonds while periodically examining their risk tolerance for elevated volatility. Though it may feel like this time is different, markets have shown resilience throughout history when confronted by wars, pandemics and other crises.

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Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities. Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed. Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organisation; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.

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AI is reshaping bond markets, driving divergence in outcomes and signalling a greater need for active, research-driven investment strategies.

Key takeaways

The Artificial Intelligence (AI) revolution has a number of clear implications for bond investors:

• The Sovereign bond investor – AI has the potential to have a marked effect on the shape of sovereign yield curves. A long-term productivity boost from AI could help advanced economies address debt sustainability as well as achieve higher growth with lower inflation. In turn, this could drive flatter curves over time and reinforce the safe-haven status of these institutions. However, debt burdens are likely to worsen before the productivity benefits from AI manifest, which could lead to higher term premia and steeper yield curves in the short term. Additionally, high dispersion of outcomes across economies is expected based on their ability to benefit from the AI productivity boost.
• The income and credit investor – Implications for credit markets are expected to be highly idiosyncratic and evolving. Developments such as those in the Digital Infrastructure Asset Backed Securities (ABS) space offer interesting opportunities for differentiated sources of yield. However, issuance trends, new debt structures and securitised pools, as well as the effect of AI adoption across industries and regions, need to be monitored.
• The active bond manager – While AI has the potential to democratise information and provide a greater number of investors with more power to make decisions, it can also lead to commoditised insights. In our view, the key to taking active risk remains in fundamental and proprietary research, enhanced by the use of AI, to drive differentiated insights. Additionally, trading in fixed income is set to undergo a transformation with AI, meaning dedicated trading capabilities to stay ahead of these trends become vital.

Artificial Intelligence (AI) has the potential to rapidly reshape our lives, including the way we work, learn and interact with one another. Understandably, the potentially transformative nature of this technology has already impacted financial markets. But importantly, the investment-related effects of AI are far more wide-reaching than tech stocks; AI’s impact on bonds, for instance, can be easily overlooked.

For instance, AI’s effect on debt sustainability, growth and inflationary trends has potentially profound effects on bond yields, curve shape and credit spreads. In the corporate bond context, AI can have huge impacts on issuers themselves, which affects spreads and their ability to service their debt obligations. Additionally, AI could also have profound impacts on adjacencies associated with trading and execution, as well as the role of active management in fixed income investing.

While some of these themes may seem more indirect and have thus far seen less immediate impact on market prices, we believe the long-term implications for bond investors are too big to ignore today.

The sovereign bond investor – Can AI flatten the curve?

One profound implication of AI could be its influence on long-term sovereign debt levels.

Since the Global Financial Crisis (GFC) of 2008, we have seen a seismic shift in debt dynamics globally, where, in effect, developed market governments have taken on the burden of debt from corporates and households.

Across developed markets, corporates and households both embarked on a period of fiscal consolidation after the GFC. On the corporate side, regulations and investor appetite increasingly rewarded companies that demonstrated balance sheet repair, while on the consumer side, stricter lending standards and stable wage growth meant less credit exuberance. This resulted in lower levels of overall leverage being taken on by these cohorts.

In contrast, developed market governments generally saw a significant increase in debt levels, largely driven by a need to stimulate their economies with fiscal spending post the crisis. This trend has continued through the COVID period due to a combination of 1) populist governments increasingly promoting more accommodative policies and 2) increased defence and infrastructure spending after years of austerity.

The current significant level of debt, is further exacerbated by three forces:

1. Projected fiscal deficits across developed economies,
2. Increased interest expense burdens as rates have risen since 2021
3. An aging demographic across many developed market countries

These forces have left many investors concerned about debt sustainability across developed markets. From a fixed income investor’s perspective, any rising doubt about an economy’s ability to repay its debt obligation is reflected in a higher term premium, resulting in higher and steeper yield curves over time. Such doubts also reduce a bonds’ effectiveness as a diversifier in risk sell-off environments. This is because higher levels of debt put pressure on investors’ perception of government bonds being a true safe-haven asset class.

AI could be an unsuspecting saviour for the sovereign debt issues currently facing investors.

Productivity and its effect on long-term bond yields

In the recent paper The Great Global Restructuring, Capital Group experts discussed the radical effect that AI can have on global productivity. In short, AI’s ability to transform productivity across economies has the potential to lift trend global growth beyond current estimates.

While the positive impact of higher productivity transcends asset classes, its effects can be profound in the fixed income context. Higher productivity typically exerts downward pressure on unit labour costs and inflation, allowing an economy to produce more goods and services with the same or fewer inputs. In other words, an economy is able to achieve the perfect growth scenario: higher levels of nominal growth without corresponding inflationary pressure.

This in turn suggests that a sustained productivity uplift can flatten yield curves, as long-term growth expectations rise but inflation remains contained. This means long-term interest rates may not need to rise as much as they would if growth were driven by demand-side factors, which tend to be more inflationary.

Productivity and its effect on debt and deficits

But AI productivity’s benefits don’t just stop at inflationary effects, it could also provide governments with the opportunity to achieve debt sustainability.

A technical definition of debt sustainability is the ability for an economy to have nominal growth outpacing interest burdens. If AI were able to promote higher productivity, as suggested above, this could improve fiscal sustainability by expanding nominal GDP faster than debt accumulation, essentially enabling economies to “grow out” of elevated debt burdens. This scenario reduces pressure on sovereign borrowing costs and mitigates concerns about debt-to GDP ratios.

Analysis produced for our Great Global Restructuring paper demonstrates how we have historically underestimated the productivity boosts from new technologies. A case study from the PC era demonstrates that underestimating productivity contributed to a greater than expected benefit to both debt-to-GDP and the current account in the US.

For fixed income markets, this interplay shapes sovereign credit spreads, term premia, and demand for safe assets. If the same phenomenon as the PC era capitalgroup.com 4 were to happen again, AI could also give developed economies a solution to growing global debt sustainability issues, with the net result being lower-than expected debt ratios and therefore lower term premia as the perceived credit risk is lower. In turn, this reinforces the role of sovereign debt as a safe haven asset.

Sovereign bond implications and regional considerations

Whether AI has the ability to command these benefits is too early to be determined. Even if AI’s ability to flatten yield curves is clear, the transition phase is likely to be uneven. Initial capital expenditure (capex) surges and supply-chain bottlenecks could create short-term inflationary impulses before productivity gains materialise. While a sustained productivity uplift could flatten curves as outlined above, cyclical volatility in adoption phases may steepen curves temporarily.

Additionally, regional considerations are important. Some economies have demonstrated better efficiency at implementing new technologies and harnessing productivity boosts, thus curve flattening benefits could accrue unevenly across regions.

• US: The US has historically demonstrated an ability to rapidly adopt new technologies, reallocate capital efficiently, and translate innovation into productivity gains. This puts the US in a strong position to benefit from the flattening yield curve AI gains described above. However elevated fiscal deficits, potential fiscal expansion and the expected large capex cycle could pressure yield curves in the short term.
• Europe: Europe has experienced persistent productivity underperformance since the global financial crisis due to structural rigidities in labour markets, lower technology investment, and regulatory complexity. AI adoption could offer a much‑needed productivity uplift, but the pace is likely to be uneven across countries. Europe also risks having AI‑driven productivity gains that are not sufficient to materially improve debt trajectories, thereby limiting the extent of curve flattening in the short term. Investors should watch for decisive structural reform to determine if Europe’s productivity trend is to improve.
• Japan: High public debt, an aging demographic and strengths in manufacturing makes Japan a strong candidate for outsized AI-related gains. However, Japan, like Europe, has faced long-term productivity challenges, suggesting productivity gains could take time to materialise.
• Emerging markets: The potential for AI productivity boosts across emerging markets remains high but very heterogeneous. A wide dispersion of institutional quality, fiscal starting points, demographics and the ability to integrate into the global supply chains means there are likely to be many winners and losers. Investors should focus on economies that are able to improve digital infrastructure, introduce appropriate AI policies and correctly monetise AI gains (i.e. improve tax collection).

AI’s effects on sovereign curves, while profound, are likely to be uneven, dispersed and evolving. For sovereign bond investors, this dynamic introduces uncertainty around neutral rate (r*)^[1] and term premia considerations. The timing and magnitude of AI-driven growth matters. If adoption lags or fiscal multipliers disappoint, debt dynamics could remain challenging, compromising curve flattening effects.

Additionally, country selection, curve positioning, and duration management are increasingly important

Emerging markets (EM)

AI’s impact on EM fixed income is poised to be highly differentiated, reflecting the uneven pace of adoption and integration across countries.

Those EM economies that successfully embed themselves in the AI value chain, whether through data centre buildouts, semiconductor manufacturing, or digital infrastructure, are likely to experience stronger fundamentals, improved credit profiles, and enhanced market access. This integration can attract capital inflows, compress spreads, and support sovereign and corporate issuers in the short term. However, this also introduces a new layer of dependency: countries that become overly reliant on AI-driven sectors may face heightened volatility if global AI investment cycles slow or if technological shifts render certain assets obsolete.

Conversely, EM countries unable to participate meaningfully in the AI build-out risk being left behind, facing slower growth and potential crowding-out as capital gravitates toward AI-linked opportunities.

For fixed income investors, this means that country selection and sector allocation will become even more critical, with a premium placed on adaptability and rigorous due diligence as AI adoption is only likely to widen the divergence across the EM universe.

The income and credit investor – A spread tightener?

Credit markets are set to be transformed by AI, the impacts of which manifest in a number of ways across sectors.

Corporate bonds

We have begun to see a significant increase in capex on data centres, energy and cooling systems and specialised semiconductor processors by the big tech hyperscalers, a trend expected to continue in the near future. The strong cash flow generation of hyperscalers in recent years has meant that, so far, cash flows have outpaced their AI capex needs. However, a spike in net supply for in the latter part of 2025, largely attributable to AI capex, indicates that this might be changing.

A short-term challenge for investors will be how to absorb new supply of debt. A recent Goldman Sachs survey found that 70% of corporate issuers expect more than US$500bn worth of AI-related corporate bond issuance over the course of 2026. By way of comparison, 2025 saw roughly US$200bn of such issuance, which was already more than double the prior year’s level.

Increased issuance offers more investment opportunities for investors at the forefront of AI infrastructure but also presents risks of technical headwinds on spread levels of new supply as well as higher leverage and pressure on cash flow margins.

For companies, AI is a major disruptor to existing business models that is set to create both winners and losers. On the one hand, AI adoption has the potential to transform company margins and productivity. However, as the market is capitalgroup.com 6 starting to test, AI agents could also have serious implications for the viability of some business models.

Software application companies have been the first to face this challenge with companies in the sector seeing an aggressive rerating of their equity following the launch of powerful AI models such as Anthropic’s Claude.

While exposure to software-related issuance in both investment grade and high yield corporate bond markets remains low, other sectors of credit, such as leveraged loans, Collateralised Loan Obligations (CLOs) and private credit, have demonstrated higher exposures to these areas, which warrant monitoring.

The following table highlights some of the emerging themes we have already identified across key sectors.

A sector level insight into AI

And some industries already on the AIO frontline

Selection remains critical in corporate bond markets. Not just deciding between sectors, but also the companies within sectors that can better harness the benefits of AI in their business models.

Securitised markets

If the trend to finance AI infrastructure continues to transition from equity or cash-funded models to debt-funded strategies, this could also affect securitised markets. Capital Group expects strong issuance of both Digital Infrastructure Asset Backed Securities (ABS), incorporating both data centre and fibre ABS, and data centre-backed commercial mortgage-backed securities (CMBS) over the coming few years. This trend points to important considerations to watch in securitised markets that present both opportunities and challenges.

As a starting point, an expanded securitised bond market provides investors with a broader and more diversified investment universe from traditional securitised pools, which are typically driven by consumer revenue (credit card, student loan, auto loan, residential mortgages) or commercial real estate revenue (retail, hospitality, office).

New pools backed by AI-related mission-critical assets like data centres and fibre infrastructure act as a nice complement to existing opportunities for investors. The structures also provide another stream for investors to access the AI revolution more directly and, given their essential role in AI workloads, should broadly be seen as resilient in a world where the prominence of AI is justified.

However new structures also present challenges and risk. Any general hesitation on the adoption of AI could quickly make these assets obsolete, and their success becomes heavily tied to the direction of the AI trend. Additionally, the new structures introduce complexity in risk assessment, requiring advanced analytics and dynamic management to understand the risks. Finally, similar to the corporate bond space, the level of issuance is yet to be determined, and this could cause volatility from a technical perspective.

Ultimately, for securitised credit investors, the investment landscape is set to offer a wider range of opportunities in the years ahead; however, capturing value will depend on a commitment to thorough due diligence, careful examination of collateral, and the ability to adapt to shifting benchmarks and liquidity environments. As an example in the case of data centre ABS, proximity to regional hubs to reduce latency and energy costs are key considerations to determine not only the effectiveness of a digital asset, but also its reusability if it needs to be recommissioned to a non-AI purpose.

The Active Bond Manager

Investment research

Alongside the investment implications outlined above, AI is rapidly transforming the landscape of active fixed income investment management by empowering professionals with advanced tools for synthesising and summarising large, fragmented data sets.

This capability allows managers to efficiently process vast amounts of information from diverse sources, such as central bank judgments, economic data releases, company earnings announcements and policy documents. Additionally, AI tools can assist in producing cash flow analyses and forecasts more efficiently. In the not-too-distant future, AI could potentially be an important tool used in risk management, anticipating market movements and identifying emerging risks with greater precision.

However, as AI tools become more accessible and widely adopted, there is a growing risk of proliferation of commoditized insights, which we believe increases the value of fundamental, proprietary, and individualised research.

For instance, understanding policy makers’ objectives becomes vital in anticipating future moves of central banks, while understanding the true risk of a corporate’s ability to pay back its obligations requires a close understanding of the company’s future prospects and direction of travel. Some of these insights can only be gleaned from experience with these institutions and direct engagement with policy makers and company management. As such, active managers who combine AI-powered analytics with unique qualitative insights can better understand risk and generate enhanced returns.

Trading and execution

While there have been significant developments in the world of bond trading over the last few decades, the majority of the fixed income world remains a largely over-the-counter (OTC) market. This is partly due to the sheer breadth and depth of markets (over 30,000 issues in the Bloomberg Global Aggregate Bond Index), and the relatively short life-span of bonds.

These factors contribute to issues with price discovery, liquidity and timely execution, issues that are exacerbated by increasing dealer balance-sheet constraints since the GFC and, more recently, the prominence of private credit.

By accelerating price discovery through alternative data and predictive analytics, AI could enable market participants to identify opportunities and risks with greater speed and precision.

Algorithmic strategies powered by AI can also play a significant role in concentrating trading flows, which can amplify both liquidity and volatility, especially during periods of heavy issuance or market stress.

For investors, understanding these evolving liquidity regimes and transaction cost dynamics is critical for effective execution and risk budgeting in an AI augmented fixed income landscape. We believe to maintain an edge in fixed income amid these developments, dedicated and experienced trading capabilities able to harness these tools are vitally important.

Conclusion

AI’s influence on fixed income markets is only just beginning. Its eventual effects will become more apparent as time progresses. Even at this point, however, certain conclusions can already be reached.

Our analysis suggests that, over time, productivity gains from AI could lead to flatter yield curves, but in the interim, uncertainty, increased spending and heavy government debt burdens are likely to add steepening pressure to curves. The impact on credit markets will be diverse, shaped by issuance, business models and levels of AI adoption.

For investment management, differentiated research and dedicated trading capabilities will likely become increasingly important for success.

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References:
[1] The neutral real interest rate (r*) is the real short-term rate consistent with an economy operating at full employment and stable inflation, such that monetary policy is neither expansionary nor contractionary and the economy is in long-run equilibrium.

Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates. This communication is intended for the internal and confidential use of the recipient and not for onward transmission to any other third party. This communication is of a general nature, and not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities. All information is as at the date indicated and attributed to Capital Group unless otherwise stated. While Capital Group uses reasonable efforts to obtain information from third-party sources that it believes to be accurate, this cannot be guaranteed. In Australia, this communication is issued by Capital Group Investment Management Limited (ACN 164 174 501AFSL No. 443 118), a member of Capital Group, located at Suite 4201, Level 42 Gateway, 1 Macquarie Place, Sydney, NSW 2000 Australia. All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company. All other company names mentioned are the property of their respective companies. © 2026 Capital Group. All rights reserved.

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China is already at the forefront of humanoid development.

Key takeaways

• Building on its success in electric vehicles (EVs), China is now shifting its attention towards humanoid robotics as the next frontier for technological leadership.
• This transition draws on deep parallels between the supply chains of humanoids and EVs, allowing China to leverage its expertise in batteries, motors and large-scale manufacturing.
• While Chinese original equipment manufacturers (OEMs) are pursuing task-specific industrial humanoids, Western developers are prioritising high-end, general-purpose models.

China’s rise to dominance in EVs, from batteries to motors to mass production, is a testament to the nation’s success in evolving an innovative endeavour into a full-fledged industry. This achievement has set the stage for China’s ambitions in the humanoid robotics sector, sparking industry-wide debate on whether the same formula can be applied?

At the most recent CES 2026 – one of the most influential technology exhibitions of the year – many Chinese companies seized the opportunity to unveil their latest humanoids. Humanoids were, in fact, a standout theme at this year’s event, with 38 exhibitors showcasing humanoid robotics. Of these, 21 hailed from China, underscoring the country’s intensifying focus on this emerging domain. US-based Boston Dynamics made headlines by presenting the first commercial, all‑electric iteration of its Atlas humanoid. The Atlas demonstrated remarkably fluid movement, fully rotational joints and could handle payloads of up to 50 kilograms, signalling a shift from laboratory testing to practical industrial applications. In comparison, Chinese exhibitors revealed a variety of taskoriented humanoids developed for specific roles within factories and warehouses, such as robots designed for material handling, sorting and inspection tasks. These examples illustrate both the push for general-purpose adaptability, as seen with Atlas, and the targeted, pragmatic approach favoured by Chinese manufacturers.

Promise or paradox?

Humanoids are machines designed to move and act like humans. They are envisioned for a range of uses but are currently being piloted in factories and warehouses to do labour-intensive and repetitive tasks like moving materials, sorting goods, or performing inspections. Longer-term, humanoids could even assist in health care and elder care, perform domestic chores alongside humans and tackle labour shortages as the working population shrinks.

Bold visions come from bold thinkers with bold numbers. Tesla CEO Elon Musk has mused that by 2040 there will be more humanoids than people^[1], which implies a massive trillion-dollar global opportunity. Meanwhile, Nvidia’s CEO Jensen Huang proclaimed “the ChatGPT moment” for general robotics is just around the corner, alluding to a scenario where rapid AI development and proliferation could soon drive a similar breakthrough in the field of robotics.

More conservative projections estimate that the humanoid robotics market could reach approximately US$51 billion by 2035, contingent on a substantial decrease in robot prices from current levels.^[2]

While estimates may differ, what is clear is that investments into humanoids are increasing exponentially. Global funding of humanoid startups was almost inconsequential at the turn of the decade but has since gone on to reach US$1.2 billion in 2024. DroidUp, Robot Era and X Square Robot are just some of the many humanoid companies to have been founded in China since 2020. Notably, a number of these start-ups have been spun out of universities or maintain close affiliations with academic institutions and many have secured funding from major corporations such as Alibaba Cloud, Tencent and Huawei.

Challenges facing humanoid deployment

Key tech hurdles: Although advancements in AI have accelerated progress, key hurdles remain for humanoids to be adopted widely.

Training data and robot intelligence: Humanoids must rely on vast amounts of real-world data to learn through trial, error or imitation. Although simulated data can be useful, the gap between virtual and real-world conditions means many robots still struggle in real-life scenarios.

Software and control constraints: Most existing humanoids are semi-autonomous, carrying out preset tasks under human or system supervision. Achieving full autonomy requires advances in real-time perception, planning and safe learning.

Power and battery life: Humanoids generally weigh between 50 and 70 kg and operate only for one to two hours per charge. Batteries continue to be heavy and costly, which affects practical deployment.

Mechanical reliability and design trade-offs: Walking and object manipulation require motors and joints that can withstand various operational demands. Early models are prone to overheating and mechanical wear.

Expensive price tags: An advanced unit such as Boston Dynamics’ Atlas has been reported to cost up to US$150,000. Humanoids built for specific tasks also typically cost several tens of thousands of dollars per unit.

Considering the significant investments and high costs associated with humanoids, a critical question emerges: what must happen for humanoids to become financially viable to kickstart a self-reinforcing flywheel that can lead to the advancement and proliferation of humanoids?

The key takeaway is clear: scale is everything. For the humanoid industry to break even, they will likely need to achieve annual sales of at least 100,000 units, mirroring the threshold that recently brought cobots close to profitability. To move beyond breakeven and enjoy the solid profitability seen in the industrial robot market, which operates at over 500,000 units a year, humanoids would have to match these far higher volumes.

Given that current humanoid shipments are well below these figures, it would be at least five years before the industry even approaches breakeven levels, with true profitability remaining a longer-term goal. That said, this should be seen as a feature rather than a flaw. It mirrors the early stages of previous major technological shifts, where progress depended on continued innovation, the development of practical use cases (and data), growing demand and, ultimately, profitability.

“Bots” at a glance

Industrial robots

• Design: Large, rigid robotic arms or gantry systems.
• Purpose: High-volume, highspeed automation in manufacturing environments.
• Common applications: Coating, chassis and engine assembly, welding.

 Cobots

• Design: Typically arm-like, smaller than industrial robots, designed for safe interaction with humans.
• Purpose: Work alongside humans in shared spaces without heavy safety barriers.
• Common applications: Food packaging, component sorting, machine tending, quality inspection.

Humanoids: EV 2.0?

Despite the nascency of the industry, the Chinese government has identified humanoids as a strategic priority. In January 2024, China’s Ministry of Industry and Information Technology unveiled the ‘Guidelines for the Innovative Development of Humanoid Robots’, setting out a framework to foster robotic innovation. This strategic focus is further demonstrated by the nation’s organisation of high-profile events, such as the World Humanoid Robot Games, and its active encouragement for state-owned enterprises (SOEs) to engage in pilot projects and facilitate data collection. This echoes with China’s strategy for EVs, which integrated policy coordination, capital investment and industrial development.

Another reason why China’s dominance in EVs could potentially translate into humanoids is the significant overlap in the supply chain of the two products. Both rely on electric motors, power electronics, batteries and sensors, areas where China has built formidable capacity and know-how. For example, the lightweight electric actuators that move a robot’s limbs are cousins to EV drivetrain motors and high-density battery packs for robots draw directly on advances from EVs.

As a result, many Chinese auto suppliers are repurposing their products for humanoids. Companies like Zhejiang Sanhua Intelligent Control and Ningbo Tuopu Group, originally making EV thermal and chassis parts, are reportedly assembling joint modules for Tesla’s Optimus humanoid. 8 China’s extensive electronics and automotive ecosystem (motors, gear reducers, lithium batteries, camera modules, etc.) means much of the humanoid “body” hardware can be sourced locally and at scale.

The east vs. the west

As more companies are showcasing their humanoid prototypes globally, a clear emerging theme is the divergence between Eastern and Western development philosophies. Both are racing toward similar goals, but they have chosen different routes.

Conclusion: A shifting global landscape

In summary, China’s momentum in the humanoid sector is underpinned by its formidable strengths in innovation and execution, evident by the success in its electric vehicle dominance: an extensive, skilled manufacturing workforce, a focus on cost efficiency, robust government backing, an increasing focus on technology innovation and the capacity for rapid prototyping as well as iteration. Conversely, Western initiatives are distinguished by leading-edge AI research, advanced systems integration and software development. These complementary capabilities ensure that both regions will play critical, interdependent roles in shaping the humanoid robotics market.

Instead of a simple rivalry, the future could point towards a complex, globally interconnected value chain. It is conceivable that Chinese factories could one day produce hundreds of thousands of humanoid units, each powered by an AI operating system licensed from the US, with a blend of Chinese actuators and American-designed chips. Investors and stakeholders should pay close attention to trends in hardware commoditisation, where China holds a competitive advantage and software or intellectual property development, where Western firms excel.

However, this dynamic could shift significantly if China manages to close the gap in software and services. Recent progress in generative AI, exemplified by initiatives like DeepSeek, coupled with the rise of domestic AI chip production and China’s proven track record of innovation in the EV sector, indicate the potential for the country to extend its influence well beyond manufacturing.

Given these factors, it is therefore also essential to consider a range of scenarios in which China may emerge as a dominant force across both hardware and software segments of the humanoid robotics industry. This scenario analysis will help investors and industry leaders anticipate future developments and strategically position themselves within an evolving global landscape.

Given how early humanoid development still is, it remains anyone’s guess how the industry will evolve over the long term. But one thing is clear: China is ready and already at the forefront of humanoid development. With its dominance in hardware manufacturing and continued investments in software and AI, China has the potential to replicate its success in EVs with humanoids.

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Notes:
[1] FII8 Executive Report 2024. Source: FII Institute
[2] Humanoid Robots 2025 Report. Source: Yole Group
[3] Data accessed on 31 October 2025. Source: Standard Bots
[4] Estimates as at 12 October 2025. Source: Capital Group
[5] World Robotics 2025 Report published on 25 September 2025. Source: International Federation of Robotics
[6] Data as at 8 September 2024. Based on 2024 shipment volume projections. Source: Yano Research Institute
[7] Based on 2025 estimates from Humanoid Robots 2025 Report. Source: Yole Group
[8] Data as at 4 March 2025. Source: Yicai Global

Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates. This communication is intended for the internal and confidential use of the recipient and not for onward transmission to any other third party. This communication is of a general nature, and not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities. All information is as at the date indicated and attributed to Capital Group unless otherwise stated. While Capital Group uses reasonable efforts to obtain information from third-party sources that it believes to be accurate, this cannot be guaranteed. In Australia, this communication is issued by Capital Group Investment Management Limited (ACN 164 174 501AFSL No. 443 118), a member of Capital Group, located at Suite 4201, Level 42 Gateway, 1 Macquarie Place, Sydney, NSW 2000 Australia. All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company. All other company names mentioned are the property of their respective companies. © 2026 Capital Group. All rights reserved.

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Since the 2010s, digital innovation has taken centre stage.

Key takeaways

• While change is normal in the global economy, today’s environment stands apart for its confluence of transformational and multi-generational shifts.
• As a result of this rare convergence, the next decade and beyond could present a richer and more diverse set of investment opportunities.
• It is therefore important to identify investment strategies that can flexibly navigate significant structural shifts while keeping true to their objectives and philosophy.

If we look back at equities over history, markets have tended to move in decadal mega cycles, where one major ‘theme’ has dominated.

This is especially evident when we examine the years since Capital Group began investing globally.^[1] Tracing the evolution through the decades, we see that each era has been defined by a prevailing trend: the 1970s were characterised by energy and commodities; the 1980s and 1990s saw the rise of computing and mobile technology; the 2000s were marked by global trade and the emergence of China; and, since the 2010s, digital innovation has taken centre stage.

Being on the right side of these trends has proven extremely beneficial for investors. Over the past decade, one of the most pronounced trends has been the dominance of a select group of US-based, mega-cap technology companies. Supported by an environment of low interest rates, these companies have driven a substantial share of equity market returns, resulting in increasingly concentrated market leadership. However, that has begun to change as a new era of higher inflation and interest rates, and rising geopolitical tension, is marking the beginning of a prolonged shift, the scale of which we typically only see every 10 to 15 years.

A unique point in history?

What is particularly unique, and exciting for investors, about this current juncture is that there appears to be a confluence of transformational and multigenerational shifts occurring simultaneously. In this paper, we will discuss four key areas and examine how we are identifying the long-term investment opportunities that they present.

We expect these powerful forces to drive far broader market leadership and a much richer, more diverse set of investment opportunities over the next decade and beyond. However, this does not mean stocks that benefited from previous trends, such as large-cap US technology companies, cannot continue to produce strong returns. These companies, having shaped earlier cycles and established substantial competitive advantages, may still benefit from ongoing structural shifts. Nevertheless, they could be joined by businesses from other sectors and regions, each exposed to different structural tailwinds. In other words, this could be particularly fruitful for bottom-up, global stock pickers.

1. Artificial Intelligence

Artificial intelligence (AI) is set to be one of the most disruptive technological forces of our generation. Its potential as a “general purpose technology,” a category defined by wide-reaching applications across many sectors with the capacity to drive substantial productivity gains and foster further innovation, places it alongside transformative developments such as the steam engine, electricity and the internet.

One of the most attractive features of AI is its potentially huge total addressable market (TAM). Estimates vary considerably, but a 2025 report from UN Trade and Development (UNCTAD) projected that the global AI market will soar from US$189 billion in 2023 to US$4.8 trillion by 2033.^[2] However, from our experience over prior technology cycles, it remains crucial to separate short-term hype (or noise) from longer-term opportunities. Establishing a framework to analyse the different opportunities and evaluating their current as well as future investment potential may therefore prove beneficial.

Our investment professionals are evaluating companies at the forefront of AI enablement and development by examining them through a four-layer technology stack. At present, their primary focus is on businesses operating at the foundational levels of this stack, often described as the “picks and shovels” providers of AI. This includes the global semiconductor ecosystem, which serves as the essential building blocks, alongside companies delivering the digital infrastructure, most notably, the cloud hyperscalers.

Looking further up the stack, the landscape becomes more dynamic and less predictable. The rapid evolution of large language models means it is uncertain which, and how many, will ultimately establish themselves as long-term leaders. At the top of this stack is the application layer, comprising companies that deliver AI-powered services directly to end users.

In the short term, we see compelling opportunities among established software providers as they embed AI capabilities to enhance customer experience and operational efficiency. However, over the longer term, we anticipate significant disruption within this segment. AI is likely to give rise to entirely new categories of applications as well as innovations that are difficult to fully envisage today. This is reminiscent of the paradigm shift following the launch of the first iPhone in 2007, when few could have predicted the advent of transformative platforms such as Uber or Airbnb.

Beyond the core technology sector, a wider range of companies stand to benefit from the expansion of AI. Secondary beneficiaries are emerging because of the accelerating development of datacentres. Notably, close to half of the capital expenditure allocated to datacentres is directed towards areas other than semiconductors, such as the construction of the physical facility, implementation of power infrastructure, and installation of advanced cooling systems.

Demand for raw materials is becoming increasingly pronounced, with a typical datacentre requiring between 5,000 to 15,000 tonnes of copper and extensive networks of glass fibre cables stretching millions of miles.^[3] Power generation is set to become a critical area, as projections indicate demand over the next three years equal to adding more than Japan’s annual electricity use to global consumption each year.^[4] Should traditional electricity grids struggle to meet this surge in demand, alternative solutions, including small modular nuclear reactors, may gain significant traction.

Further along the value chain, tertiary beneficiaries are leveraging AI to strengthen their competitive edge, whether by enhancing product and service offerings or streamlining operational costs. The potential for AI-driven transformation extends across all sectors, though industries such as healthcare, financials, and consumer-facing services appear particularly well placed. For instance, JPMorgan Chase reported in May 2025 that operational efficiencies generated by AI resulted in cost savings of US$1.5 billion. That said, the impact is unlikely to be uniformly positive for all companies, making rigorous research essential to identify those organisations adopting AI swiftly and effectively, and distinguish them from those lagging behind.

Given the rapid pace of technological change, maintaining a disciplined approach to valuation and remaining adaptable to evolving market dynamics will be crucial for investors seeking to capitalise on opportunities presented by AI.

2. Industrial renaissance

The decade following the global financial crisis was marked by ultra-low interest rates and bond yields. During this period, investors seeking long-term capital growth tended to favour asset-light, digitally focused disruptors and innovators. In contrast, companies operating in more traditional or cyclical sectors, particularly those engaged in manufacturing physical goods, were largely overlooked.

Since then, profound shifts in both financial and geopolitical landscapes have emerged, potentially paving the way for well positioned industrial businesses to thrive. Evidence is mounting of an “industrial renaissance” fuelled by several enduring themes, setting the stage of a significant capital expenditure cycle not seen for many years. As a result, old-economy cyclical manufacturers could become critical enablers in shaping the future economy and, in doing so, have the potential to evolve into secular growth businesses.

One area poised to benefit is the aerospace and defence sector, where companies are supported by favourable long-term supply and demand dynamics. Commercial aviation, for example, has rebounded from the pandemic and is once again experiencing demand growth that outpaces global GDP growth. Defence businesses also stand to gain from structurally higher government expenditure as geopolitical tensions remain elevated and alliances shift. The sector’s consolidated nature and substantial barriers to entry afford incumbents robust competitive advantages and pricing power. Additionally, revenue streams in this industry are attractive, with contracts often secured years in advance and routine maintenance providing dependable cashflow visibility.

Electrification represents another powerful driver underpinning growth across industrials. Beyond the imperative to decarbonise, electrification supports energy security and independence, facilitates the ongoing digital transformation of the global economy, and enhances operational efficiency while reducing costs. Enduring trends such as electric and autonomous vehicles, factory automation, and the continued proliferation of data centres are expected to persist. This environment presents compelling investment opportunities in businesses supplying power generation equipment, energy management solutions, and automation technologies.

3. Health Care innovation

A barrage of external factors such as the potential impact of tariffs, drug pricing reforms and uncertainty at the Food and Drug Administration (FDA) have weighed on the health care sector over recent years. Nevertheless, when taking a long-term perspective, many of our health care analysts remain optimistic about the multi-decade innovation tailwinds from which the sector stands to benefit. While medicine has advanced significantly over the past century, several of the most common and life-limiting diseases still lack effective treatments, representing substantial potential market opportunities. We anticipate meaningful progress in areas such as cancer, obesity, cognitive impairment, and pain management over the coming years.

Additionally, breakthroughs in genomic sequencing and data processing are allowing drug companies to research, develop and deliver highly targeted interventions for illnesses, marking what we believe to be a “third wave” of biopharma innovation. For instance, RNA interference (RNAi) technology allows scientists to correct errors in genetic code by identifying defects and effectively silencing them. Gene therapy involves replacing missing or defective genes with functional ones to treat disease, while gene editing allows for the precise modification of specific genome sequences.

This genetic era is unfolding alongside the emergence of another transformative technological advancement − AI. Currently, over 90% of all experimental medicines in development are expected to fail^[5] but studies suggest using AI to expedite drug discovery could improve the R&D efficiency of drug exploration and could lead to 50 additional novel therapies over the next decade^[6] .

Innovation within the health care sector is further supported by companies supplying essential tools and services to laboratories, presenting attractive pick and shovel opportunities. In addition, medical devices such as robotic surgical systems and smart eyewear may offer a broader range of investment prospects, each with distinct growth dynamics compared to the core biopharma segment.

4. Evolving consumer trends

The consumer sector stands out as fertile ground for companies that are enabling, driving, or benefitting from long-term transformational global trends. Given that household consumption accounts for approximately 67% of global GDP^[7] , the sheer scale of the sector amplifies the impact of ongoing changes. Unprecedented shifts, such as structural demographic transitions, rapid technological advancements, and evolving lifestyles and habits, are collectively generating a diverse range of long-term investable themes. These opportunities span developed and emerging markets and encompass a variety of segments, including consumer discretionary, consumer staples, communication services, financials, and industrials.

One compelling development for long-term investors is the rise of the “experience economy”, which reflects a shift in consumer preferences towards valuing memorable experiences over material possessions. This is being fuelled by rising disposable incomes, the amplifying effects of social media, and changing demographic preferences, particularly among younger generations. For instance, cruise travel tends to foster strong customer engagement and brand loyalty, supporting recurring revenue streams and pricing power. Such businesses are generally more resilient to commoditisation and can benefit from network effects, offering attractive growth prospects over the long term.

The acceleration of online and mobile services is particularly evident in the retail space, as time-constrained consumers seek convenience alongside an enhanced experience. E-commerce platforms are using data analytics and personalisation to drive customer engagement and conversion, while scalable logistics and payment systems create significant barriers to entry. The integration of technologies such as AI, augmented reality, and social media is further enhancing user experience and encouraging higher consumer spend, allowing platform-based ecosystems to compound value over time.

Heightened health awareness, increased demand for plant-based and functional foods, and concerns regarding environmental impact are reshaping global dietary trends. Food and beverage companies that are repositioning their portfolios towards more nutritious products and sustainable supply chains are well placed to command premium pricing and foster greater brand loyalty.

A subset of companies could be better placed to navigate these changes

A cohort of companies that has proved particularly effective in responding to change is multinationals, with such global businesses typically well equipped to deal with uncertainty and disruption. For the most part, they have strong and experienced management teams, capable of navigating different − even hostile − environments. They are also used to conducting business across the world, finding ways to succeed by responding effectively to local competition.

An unpredictable environment can often play to the strengths of multinationals, which have the expertise and resources to adapt quickly. If we consider the shifting trade backdrop, for example, the larger the company, the easier it can be to reconfigure supply lines, manufacturing location and final selling point.

Investing in structural change: The Capital Group approach

It is clear, then, that the next decade and beyond could present a rich and more diverse set of investment opportunities versus the previous decade. But that also means it is important to find investment strategies that can navigate significant market shifts, while keeping true to their objectives and philosophy.

At Capital Group, there are certain features of or investment philosophy that have remained consistent for over 90 years:

• Our deep fundamental research allows us to focus on the companies that we believe are best placed to successfully navigate these changes.
• A structurally flexible approach. Investing from the bottom-up allows our portfolios to reposition over the long term to capture the potential global champions of the next cycle and generation, as the macro and geopolitical environment evolves
• Our long-term focus allows us to look beyond short-term noise and market volatility, in keeping with the long horizons over which transformational changes unfold.

We believe these principles are more relevant than ever as we enter this profound period of change.

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Notes:
[1] Capital Group was one of the first US-based firms to invest outside North America in 1953 occurring simultaneously.
[2] Source: UN Trade and Development (UNCTAD) based on various online market research reports.
[3] Data as at 8 December 2025. Source: Forbes.
[4] Electricity 2025, a report published in October 2025. Source: IEA (International Energy Agency)
[5] Data as at February 2022. Source: National Library of Medicine
[6] Data as at March 2023. Source: Morgan Stanley Research.
[7] Average household consumption as a percent of GDP across 102 countries in 2024. Source: The World Bank.

Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates. This communication is intended for the internal and confidential use of the recipient and not for onward transmission to any other third party. This communication is of a general nature, and not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities. All information is as at the date indicated and attributed to Capital Group unless otherwise stated. While Capital Group uses reasonable efforts to obtain information from third-party sources that it believes to be accurate, this cannot be guaranteed. In Australia, this communication is issued by Capital Group Investment Management Limited (ACN 164 174 501AFSL No. 443 118), a member of Capital Group, located at Suite 4201, Level 42 Gateway, 1 Macquarie Place, Sydney, NSW 2000 Australia. All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company. All other company names mentioned are the property of their respective companies. © 2026 Capital Group. All rights reserved.

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