At the moment, it can feel like every morning brings another shock, more alarming headlines and something else to worry about. Last year, at least, the turmoil of ‘Liberation Day’ did not arrive until April – this year, we are barely out of January and chaos already seems to reign.
Markets are being pulled in multiple directions by short-term events and yet, if you strip away the noise, a small number of themes continue to shape the investment landscape. AI, energy and inflation are prime examples.
AI and energy
There is no shortage of debate around whether we are in an AI bubble. That may well turn out to be true in certain areas and yet, even if valuations deflate or expectations cool, AI is here to stay. And one undeniable truth about AI is that it needs a lot of power.
Whatever form the technology takes over the next five years, data-centres, training models, storage and networks will all need energy. Demand for electricity is likely to keep rising over the medium term, making AI less of a software story and more of an infrastructure one.
Utilities, grid operators and power infrastructure companies used to be thought of as boring, low-growth and over-regulated but the investment case has fundamentally changed.
The conflict in Ukraine and ongoing tensions in the Middle East have reinforced the need in the UK and Europe to secure domestic energy generation. Regulators are allowing power companies to earn higher returns to encourage reinvestment in grids and capacity – a significant shift away from the austerity mindset of the past decade.
The same applies in the US where power infrastructure is now seen as strategically important, rather than merely economically necessary. As a result, energy companies are becoming a more compelling investment opportunity.
Outlook for inflation
So, what does this mean for inflation? On the one hand, technology is typically seen as deflationary as automation, efficiency gains and productivity improvements should combine to bring down prices over time. On the other, modern technology – and AI in particular – is driving a sharp increase in demand for energy, which could push prices higher.
This tension is already playing out in the US. Analysis by Bloomberg found wholesale electricity costs have risen by 267% over the last five years in areas near major data-centres.
Many large technology firms, including Google, Microsoft and Meta, have signed direct contracts with energy providers, effectively ring-fencing supply. While these deals may boost output, they secure energy for individual firms rather than supplying the wider grid, potentially driving up prices for consumers.
“Utilities, grid operators and power infrastructure companies used to be thought of as boring, low-growth and over-regulated but the investment case has fundamentally changed.
Investment decisions today are as much about policy outcomes and geopolitical leverage – from trade and defence spending to ‘near-shoring’, energy security and access to resources – as they are about company fundamentals.”
For now, such pressures are not feeding through into the overall inflation figures. In Europe the conflict in Ukraine has had an impact on energy prices but, as with the US, inflation is largely under control. In the UK too, it is generally easing, although, as the latest figures show, it is proving more persistent.
In addition, consumers appear under increasing financial pressure – particularly in the UK and parts of the US – with credit card defaults edging higher and household debt rising. This is likely to impact spending and makes a sharp rise in inflation in the next 12 months less likely.
That said, with ongoing geopolitical uncertainty and fragile supply chains that have only recently recovered from the impact of Covid disruptions, it is easy enough to envisage scenarios where inflation reappears.
Politics is part of the investment process
One of the clearest shifts over the past year is how much weight investment houses are placing on political outcomes. Decisions are as much about policy outcomes and geopolitical leverage – from trade and defence spending to ‘near-shoring’, energy security and access to resources – as they are about company fundamentals.
That helps explain why energy and resources sit so close to the centre of current global activity, including recent military actions and debates over ownership of specific territories. Control of power, grids and critical materials is increasingly viewed as a strategic advantage.
The key takeaway for investors is not to overreact. Politics has become inseparable from investment decisions and the headlines are loud and often unsettling, but the forces shaping markets are generally slower-moving than the news cycle suggests.
Energy, resources and infrastructure continue to drive the AI revolution and, while inflation risks have not disappeared, they are manageable for now. Remove the daily noise and the landscape looks less chaotic than it feels.
Richard Warne is a senior portfolio manager at Copia Capital
