EFG Outlook 2027: Navigating a world of change, risk and opportunity

Welcome to Beyond the Benchmark, the EFG podcast with Moz Afzal.

Moz Afzal:

Hi everyone. On the podcast today, I have Dan Murray, the deputy CIO for EFG as well. So this is a special podcast going through our EFG outlook 2027, which if you go to the links within the podcast of whatever medium you are coming to, if you just click the link, you'll be able to go to the PDF for the document and be able to download it. And you can follow with us as we talk about the key themes and what our thoughts and background were to each theme as well. So as normal with our 27 outlook, we always start with global growth. And this is all about resilience. And certainly in 2026, the global economy has been fairly resilient despite the challenges of the Strait of Hormuz and the Iran War, the economy's actually has been holding up very well. In fact, even accelerating in the latest month or so. So Daniel, do you want to just take us through your thoughts on the growth story and what are the key things you're grappling when you're writing this?

Daniel Murray:

Yeah. So when I was writing this, I was thinking how is next year likely to be different to this year? And I think at the headline core level, there probably aren't going to be that many differences. I think what has changed is that there's a wider range of outcomes that are likely, and that just reflects the fact we've matured in the economic cycle. And of course there's various sources of uncertainty. And the way I sort of phrase this is as a three, two, one type of framework. So I've thought about three downside risks, two upside risks, and one wildcard factor. So three downside risks, obviously if energy suddenly starts to become more of a problem than it has so far, that could be really damaging to the global economy. So it's notable so far higher energy prices just haven't been a problem. They haven't massively impacted core inflation and nor have they acted as a particular headwind to global growth.

But it is possible, we're just seeing a delayed impact and that's going to start to come through in the months ahead. The second risk I suppose is kind of related, which is that central banks overshoot. So most central banks around the world, certainly the major central banks are in tightening mode. There's a risk that because it's hard to know exactly when you're at the optimal point in the rate hiking cycle due to the various leads and lags that they're going to just overshoot and cause a recession. The third risk is that a major source of growth so far has been AI and possibly there's an unexpected slowdown in AI investment. There's been a bit of a wobble over the past couple of weeks and possibly that turns into something a bit bigger. So these aren't our core views, but we're just thinking about different ways in which the economy could suffer.

On the upside as well, there's also some potential positive developments. It could be that we get a swift, speedy, and fairly complete resolution to events in the Middle East. That would clearly be great from a risk perspective, create more certainty. You expect to see quite a sharp decline in the oil price off the back of that. And the second upside risk just relates to the fact that there's been a massive generation of wealth over the past few years, and the wealth effect means that it tends to be a major support for consumption. The wildcard factor just relates to the various elections that are taking place. And I think France is the poster child here and clearly it's become fashion for more extreme politics around the world. So overall, as I say, the core view, not expecting significant change in 2026, but just thinking more and more about where we could be wrong and the range of possible outcomes.

Moz Afzal:

And I think what's interesting thinking about those outcomes, the obvious ones are there, energy prices stay too high, of course there's a recession, central banks overshoot. We also talked about AI growth. So AI is a significant portion of the expected economic growth. I mean, we point out 15%. What are your thoughts around that particular point? Because it could be delayed by data centre moratoriums and so and so forth. We're talking about through the midterms, but that could slow things down.

Daniel Murray:

Yeah, absolutely. I mean, if we were to see any sort of regulatory pushback against things like data centres, if we were to see any sort of feedback loop from higher debt from some of the hyperscalers constraining their ability to bridge that financing gap, for sure that could act as a headwind to AI investment expenditure. And because it's been such a massive boost to growth as a whole, clearly that would have broader macro implications. That doesn't mean it's necessarily bad for AI story as a whole. It's not at all. It's just that the scale of the expected investment is so high that it's not impossible that at some point we'll see some disappointment.

Moz Afzal:

The other one that I thought was interesting was the wealth effect, and I don't see many people, economists, strategists, talking about the wealth effect at this point. I suspect it's a topic that's going to increasingly gain traction, but we quote some figures here that between June 25 and end of June 26, that US household net worth increased by a whopping $20 trillion, which is pretty extraordinary. Given that US GDP is what, $33 trillion, 20 trillion makes a huge dent in economic growth expectations and obviously consumer spending.

Daniel Murray:

The timing is also uncertain. Maybe we've had a part to that already. Maybe it's going to play out longer period of time, but I think it just helps us to get our arms around where potentially we could see some positive surprises.

Moz Afzal:

Yeah. And I think my core conclusion to that is that big falls in stock markets and the sensitivity for stock market falls to the global economy and the US economy in particular is probably much higher than we have seen in previous episodes. So given the sensitivity is a lot higher, the deflationary impact of a big drop in the stock market is probably much greater than it has been or certainly since our career started. And that's something that I think is noteworthy, particularly when it comes to say fixed income correlations and the way fixed incomes move relative to equities. That diversification benefit that we've often had in the past but really haven't had over the last 10 or 15 years is interesting.

Daniel Murray:

The other point of course is that with bond yields starting this cycle so much higher than they have been for the past couple of decades, that too just I think speaks to what you were just saying Mosz in terms of they're likely to be greater benefit from holding fixed income in this cycle.

Moz Afzal:

So moving then on to the second theme is we call them managing expectations and navigating the interest rate environment. And this is all about what's priced in, what's not priced in, have we gone too far or will the Fed go too far in terms of interest rates and how that dynamic will work through? I think in general, we've been a little bit more dovish in the short term on rate expectations on the basis that there's been little evidence that energy spikes that we have seen both in oil and gas have had second order impacts into the inflation metrics, but that obviously can change, which I think is the key point and thinking about those interest rate expectations is going to be key.

Daniel Murray:

Yeah, for sure. I think it's interesting just to note that how fickle the market can be and how quickly expectations can shift. You turn your mind back just a few months ago to the beginning of this year and markets were almost universally dovish about the direction of rates. And then it just took the sort of surprise attack of the US and Israel and Iran, almost overnight expectations shifted from being dovish to hawkish. And then just more recently we've seen expectations overshoot on the hawkish side and then just over the past few weeks they've become slightly less hawkish. So expectations can be very fickle. It's useful to have an anchor point. And I suppose for us, the anchor point is what's going happen to the Fed. And I think at the moment, two to three rate hikes looks reasonable from here, just given the fact that we're starting to see a few cracks appear in the US labour market. We are starting to see some evidence that previous rate hikes are feeding through. The housing market, for example, it's not collapsing, but it's not that robust either in the US. And I think of course on top of that, the elevated bond yields that we just talked about, they'll be doing some of the work of central banks. They're just generally imposing tighter monetary conditions.

Moz Afzal:

So certainly something to watch out for in terms of rate expectation. But in general, navigating that, I think possibly a little bit too much was priced in. Now it looks a bit more fair, I would say, but it is going to be that push and pull over the course of the year. The next point we make is around fiscal deficits, and this is a theme, actually a recurring theme, and it reminds me of 2026 where we talked about the circling sharks around the fiscal deficits situation. So that's still there, hasn't really changed a huge amount. And if anything, it flips between the United States, the UK, and France with France taking all the attention at this point in time. But I think again, very clear, I think one just needs to navigate that very carefully and to avoid those heavily indebted countries, particularly if their spreads are too tight.

Daniel Murray:

Yeah, absolutely. I think markets are reasonably efficient, but they don't always move in a linear fashion. So sometimes you sort of hit the threshold where the market just says enough is enough. And that looks to be the situation that's happened in France. As you said, as we've previously highlighted, France, the US and the UK is three of the more vulnerable developed economies in this regard. The US, of course, has the massive advantages. It still owns the world's reserve currency, so that means it's very, very difficult for similarly the UK can still print its own currency, so that makes it tough. It's got an independent central bank. France is a challenge because it's very difficult to get fiscal reform through there, plus the fact we've got this precarious political situation compounded by the riots that are taking place at the moment. And then on top of that, the ECB is going to have to be creative if it wants to support French debt.

Moz Afzal:

So moving on to theme three is the emergence of middle power. And this really came from Mark Carney's speech at Davos earlier this year where one of the sort of quotes that really sort of stuck in the mind around the middle powers was if we are not at the table, we are on the menu. And I thought that was actually quite an apt way to describe the geopolitical situation that we're faced with at this point in time. So the concept of the middle power is essentially, and we've used some artistic licence, so we've put into three blocks. We've got the superpowers, and this is kind of well depicted on figure eight in the presentation. And where we highlight the fact that old power, so this is the traditional powers of call it the Europe, UK, France, Germany throw in their Japan. And their GDP contribution to world GDP was around 35.5% in 1995, is only now 14.3%.

It's changed a lot where the superpowers between the US and China have grown enormously as those two economies have continued to power ahead. So you've got, think of this as three blocs, you've got the superpowers, US and China on one side, you've then got the old powers in terms of Europe and say Japan. And then you've got these middle powers, which are essentially Australia, Canada, Saudi Arabia, Turkey, and some of these India. So you've got these, if you like, new emerging economies that have basically got to make a decision. Do they get swallowed up by the US or do they get swallowed up by China? And here we're not talking about invasion, we're talking about combining in terms of trade tariffs and sharing of intelligence and AI and the similar things that US and Europe did with NATO and the World Bank and all these other institutions or organisations that have been going on, United Nations have been going on since the Second World War. And clearly the Trump administration and the last, call it 10 to 15 years has seen this break as China has continued to be a little bit stronger. So something new.

Daniel Murray:

I think it makes complete sense. I think it's really an extension of what we talked about before, which is the multipolar world. It's just putting a bit more meat on the bones. But I think historically obviously the US was the leader of the Western world and whether you were the EU or other sort of Anglo-Saxon or Western aligned countries, you could rely on the US for military support, for economic support, for political support. And now you can't. It's not that the US is actively hostile, or at least not in everything, but you can't rely on it. And so given that there's no other country or economy that's as large as the US other than China, I think it's natural for countries to seek to join together, pull common interests and try to create a centre of gravity or try to pull the centre of gravity away from China and the US. I think it's inevitable.

Moz Afzal:

Well, I think this is part of the influence is the old powers kind of need to build consensus amongst these other countries that have fallen by the wayside. Canada is a classic example where the Americans have held Canada to hostage. And certainly Mark Carney, I guess given his European roots, he's probably much, much more capable to do a deal with Europe and be able to say, "Well, we're not going to rely on the United States as much as we used to." And then you can see the same thing with Australia when it came to China. In Australia, China at some point were very, very close and that relationship has also strained. And you can see Japan has always been very close to the United States. I don't know necessarily that will change, but they've also got to look at identity as American superpower, certainly military superpower has gradually been diminishing around the world as they go their own way.

And I think that to me is why it's so important for these countries to come together. The way we contextualise this is to think about GDP and the changing shape of GDP across the globe between superpower, old power and middle powers. And then we've put it in the context of military spending where China and US clearly outspend all the other countries in some places, all the other countries combined. And also I call the future is how much money they're spending on AI. And US and China are by far spending the most and many other European and those middle economies are not spending nearly enough as they need to. So I think this gives us maybe a clearer framework to think about how this may evolve over time. Moving on to theme four, and in some respect, this is a little bit more straightforward. We call it AI's next phase, the promise and perils of a CapEx supercycle. Maybe do you want to set the scene, Daniel, in terms of how much money's being spent by the AI companies and MAG seven in particular on CapEx?

Daniel Murray:

It's a lot. It's a big number. So essentially next year these companies, it's actually a relatively small number of companies. We've highlighted five, you could add to it even more. This is not the complete sample by any means. They spent over a trillion dollars in AI CapEx next year. It's a massive amount. And of the share of global growth next year, we think it's going to amount to about something like 15% plus or minus a bit. So it's obviously a much smaller share of total GDP, but in terms of the growth of GDP, it's going to contribute a massive amount to it. So really important. Also, if you add on peripheral spending around other stuff around AI, the numbers go up even more. But I think there's also these question marks over at what point does the spending just become too much? So super exciting. Clearly AI is here to stay and it's going to be hugely influential. Clearly it's going to require huge investment over the years, but when our company's spending too much, when are we going to see excess capacity?

Moz Afzal:

So I think debate is raging. I suspect that debate is going to rage all of next year as well. And the numbers are just big. I can't recall a time such as this where the amount as a percentage of overall GDP is so big. As I said, we've got conservative 15% because we're just talking about the big companies, but if you add everything else together, it's probably going to be even more than that. These are the richest companies ever. And so they have the ability to finance this. This is not their only business. They're doing it as part of a conglomerate status, and I think that is probably the key when people think about previous bubbles and cycles. The other stat I think is quite interesting. We show you analysis and breakdown of how much debt they will issue and how big they will become as part of that issuance.

And I think that is certainly something that blows your mind. So we expect by 2030 that the hyperscalers will be roughly 16% of the bond index. And that's a pretty big number considering they're already very big number in the equity index. So if you're running a balanced portfolio, you're actually doubling up your risks in fixed income and equities as they're both either large equity holders and the large issuers as well. And we go through that in a lot more detail and talk about Europe and the United States and the different initiatives they have. So moving to next section of the outlook is the secular change. So we'll probably speed up a little bit here. And the first one is when AI starts hacking back. And so this is a very interesting discussion around how AI and the various different AI models, starting with Mythos that was released by Anthropic earlier this year and where the whole world was up in arms about the security of AI and what needs to be done. As we were recording, the finance hack was released late last week and that just underlined yet again how important it is for AI itself to protect organisations and individuals and governments going forward. Any thoughts from your side on Daniel on this pretty straightforward one?

Daniel Murray:

Yeah, I think it's fascinating. This is straight out of a sci-fi movie. I think the two main dimensions I picked up on here is one, it's the possibility that AI starts to invent itself. So it just recursively improves itself and actually the human element disappears. And I think that's incredibly interesting, but also slightly dangerous because then humans potentially lose control over understanding what's what. I think the second aspect is this collusion between agents that we saw with the hugging face incident. And it's also fascinating that these agents colluded in a way that they weren't asked to, they just took it upon themselves to do it. And clearly that's really interesting, but also brings with it some risks. And I think because of that, it's sensible to look at regulation. I think one of the challenges is that the people who want a light touch will say that until something really bad happens and then they will be pulling for regulation.

Daniel Murray:

Yeah, no, absolutely. And we touch upon AI software spend, continue to see big increases and sucking away some budgets from some of the other software companies, but anything that has client data and needs security to go with it is obviously a focus for our investment portfolios. So moving on to theme six, which is from defensive to disruptive, how AI is rewriting healthcare and biotech. And again, built upon the AI theme, we're no longer talking about data centres too much, but really talking about how AI is being implemented in everyday organisations and sectors. And we picked out healthcare because we'll start seeing in 2027 AI driven drugs starting or so data analysis from AI starting to find its way into drug discovery. Obviously regulators will have a huge part to play there, but also we're looking at AI in terms of how they respond to simple things like healthcare or insurance queries where chatbots and so on and so forth can actually just improve and facilitate the whole healthcare provision, as well as obviously the drug discovery and the technology that goes behind it.

So pretty exciting times in that space and holds a lot of promise. Our thoughts are what impact may have on healthcare and biotech valuations. For example, if you can discover a drug much faster because of the data and analysis that AI provides you with, do you put a high multiple on them than you would've done in the past?

Daniel Murray:

I think you covered it really well there, Moz. It's changing the way that we think about medicine. It's no longer do you have to have scientists in a lab concocting new things and trialling everything on living beings. You can do a lot of this now hypothetically using AI. And that means, as you say, it's both enhancing the discovery process, but also enhancing the development process. Once you've discovered the possibility of a new drug, you can test it and trial it and just get it to markets arguing about a quarter or a fifth of the time, which is phenomenal.

Moz Afzal:

Yeah, absolutely. So moving then on to theme seven, which is energy sovereignty, power security, I guess energy and power security in a fragile world. So I guess it's been very interesting over the last few years where we obviously had the Russia-Ukraine crisis. We then have now the Gulf crisis and obviously the Gulf crisis of the past has really meant that countries have become extremely vulnerable to energy price shocks as well as in some cases refining capacity and so and so forth. So it's become a really difficult topic. Now at the same time, we have data centre proliferation, which is also very power hungry, as well as developments in electric vehicles and so on and so forth. And I think one of the big takeaways from 2026 for most planning departments, even large corporates or indeed government is that how do we develop and have energy sovereignty?

So all these crises happen, but we are not as impacted as we have been over the course of the last five years, as Russia, Ukraine being part one of that. And of course, data centres are very power hungry and now they're being built across the United States and indeed throughout Europe. The spin that we have on this is very much around energy security and power security for data centres and from everything from providing the provision of power to cooling of data centres, which is quite key. And then obviously using green energy to power a lot of those initiatives as well as of course with transport and thoughts on how things are going to develop around there? I mean, we've even got north sea oil coming out now.

Daniel Murray:

I think clearly the need for increased energy generation, particularly electricity generation, is going to grow at a very rapid pace over the next few years. That is naturally going to require huge investment in whether it's the grid or batteries, other forms of storage, transformation cables and so forth. And there's big question marks over how you do that. It's very hard to get from where you are today to where you want to be in a short space of time. So it's going to take concerted effort. And I think clearly this relates back to what you said earlier about the middle powers. And if you are the US, you're pretty energy independent. If you are China, you are a heavy energy importer, but arguably you'll be able to leverage your relationship with Russia. But I think Europe is a different kettle of fish. Europe historically received a lot of energy from Russia.

That's obviously not possible now, and you can't build nuclear reacts overnight. And anyway, nuclear is not always politically possible. So I think it raises interesting questions. And if you don't have energy independence, then it doesn't matter how much you want to be independent in other dimensions, it's very hard to do so.

Moz Afzal:

So theme eight is about Japan. So Daniel, you and I were in Japan just a few weeks ago kicking the tyres, but maybe you want to summarise the key points from both that Japan trip as well as the theme.

Daniel Murray:

The quick is that of course the long-term structural constraints are still there. There's terrible demographics and the country's got this massive pool of debt that isn't going to shrink or at least not shrink very rapidly anytime soon. So there's these big structural headwinds, but one just feels that there's a lot of positive change with regards to Japan. One positive change is just that the rest of the world is catching up. So the rest of the world's demographics are now looking not dissimilar to where Japan was 15 or 20 years ago, but Japan is now sort of a long way through that. So has learned how to live with it and deal with it much better. And also in terms of debt, there was a time when Japan's debts GDP levels just looked ridiculous and now other countries are playing catch up. So I think in that respect, Japan just no longer looks like so much of an outlier.

But I think more than that, it's certainly true that the underlying growth and inflation dynamics look much more positive. You remember Moz, we met several people who talked about how inflation was now well entrenched, but perhaps more importantly, wage inflation was consistently rising above price inflation, which is really positive. And moreover, wage inflation is... Strongest for younger workers. They're really positive dynamics. And I think on the investment side of things, there's been a push for corporate change in Japan, better standards of corporate governance for as long as I can remember. I've been doing this for 30 years and I can remember pretty much on day one of my career, somebody telling me how bad corporate governance was in Japan. Well, I think things are changing, but it has taken 30 years, but we're moving in the right direction. And slowly and steadily, I think Japan is changing and for the better. So I think it's really exciting, really interesting.

Moz Afzal:

I think the other thing that really sparked my interest was that a lot of the Japanese corporates are just in the right zone of AI in terms of providing the infrastructure, providing everything from calling to components to go into AI data centres and even capital equipment and semiconductors. So they have quite a lot of stuff that actually goes into these big data centre builds. So certainly I think that was the added impetus to our thoughts around Japan.

Daniel Murray:

Yeah, totally. And I think as well, Japan has a long history of miniaturising things and just being good at building techy stuff. And I think that will help both in terms of the backend, the build out of stuff that's needed to support the AI industry, but also in terms of the end user consumer durables that will be required increasingly to work alongside AI. So I think there's some really interesting stuff going on in Japan. And quite a lot of it is AI related, but quite a lot of it is just fundamental change as well.

Moz Afzal:

Yeah, no, absolutely. And the key point is real income growth, which is pretty positive for Japan. So moving on to the next theme of theme nine. So the penultimate one is around, we call it beyond beta, so where private capital can still create real alpha. So there are three components to this. The first is around middle market buyout and more importantly, private equity managers that can help acquire companies, but also help them to improve operations, improve profitability, and then obviously an ultimate exit. And I think that's an area that is particularly interesting at the moment because if you like the easy money of having say low cost of capital, coming in and buying it out and just realising it because you bought it cheap with cheap financing, that era is well and truly gone. So within private equity, the focus is really on firms who are able to help these private companies or take these private companies, improve their operations, improve efficiency, turn them around, push them into new directions with experience.

The two other areas of interest first of all is on secondaries. And we still in this, I call it stasis where a lot of private equity was set up years ago, companies are coming to the end of life, if you like, or funds are coming to the end of life and people want exits. And so secondaries has become a really important asset class certainly over the last few years and we continue to see that developing through. Last year, the big theme for us was that endowments in the United States were exiting their private equity portfolios given the Trump assault against them. And that certainly had quite a big impact. But this year is just a continuation of that, that secondaries are able to improve on the J-curve effect and so on and so forth. And the third area of interest is exactly around AI. So it's infrastructure and power infrastructure, which also remains a very important theme and something that we talk a lot about within the outlook. Anything further, Daniel, to add? I think this is pretty straightforward.

Daniel Murray:

I think that the important thing here is that because there's been quite a lot of money invested in private markets over the years, that you just have to be more careful about how you allocate funds. And I think just as you said, Most having a diversified approach, trying to shorten the J curve effect and trying to invest with experts and people who really know what they're doing is important because it's not easy. I think the rewards are there for people that get it right, but it's also easy to get it wrong. So just careful to be diversified and invest with people that know what they're doing.

Moz Afzal:

Yeah, I think that's absolutely the key. So we come to our last theme, which is theme 10, and we call this monetizing uncertainty, hedge fund strategies for a fragmented cycle. So as we've talked today, the cycle is very different, quite fragmented, different economies at different points of their evolution. Interest rates are also quite different everywhere from zero in Switzerland to very high rates in the United States and other places. So this leads to quite diverging trends within the macroeconomy, interest rates, stock markets, sectors, and so and so forth. Our take on this is splitting into three areas. The first is CTA, so these are typically trend following strategies, and we very nicely put this as volatility with direction. So just whether interest rates are going up, going down, or in bond markets with yields going up or going down, being able to exploit that and across currencies and stock markets as well as sectors.

So that was volatility with direction. At the same time, we call it volatility with divergence. So where the diverging trends, typically macro managers are able to take advantage of those divergent trends across different economies as they evolve, as well as key areas like the oil price, gas prices, and so on and so forth. So volatility with divergence. And the last point we make is volatility with dispersion, which something that we've noted all the way through the last 12 months is that stocks within the same sector typically are just performing very differently. And there's lots of winners and losers actually principally driven by the AI trade and AI developments. But there are lots of opportunities within a market neutral sense. So we're not taking beta risk here, but taking pure alpha risk and being able to exploit that. So Daniel, hedge funds, you and I have been invested with hedge funds for pretty much all our careers. Any thoughts to the current status?

Daniel Murray:

I think that there were a few years there, well, quite a long period of time after the financial crisis when rates were at zero, we're in a world of QE and just everything was going up. And that made the world of hedge funds much harder. And I think the current environment plays into hedge funds, particularly these three styles that are identified in the outlook. We have more dispersion within markets. We have greater uncertainty in the world whether it's geopolitical, whether it's the rates uncertainty we alluded to earlier, whether it's just the fact that the macro environment is less certain than it was. We've got higher rates, we've got quite a lot of rotation within equity markets, energy prices that are quite volatile. And so I just think this is a good period for certain hedge fund styles. And I think the diversifying properties from a portfolio construction perspective are just really valuable. So I like the space and I think it's interesting as just an aid to help to diversify returns.

Moz Afzal:

Yeah, no, absolutely. Let's see what 2027 brings for us, whether we're able to have the same achievements, but we shall see. So with that, we will wrap up there. As I said, if you go to the link in the show notes, you'll be able to go directly to the Outlook and download it. And of course, there'll be lots of information on LinkedIn as well as the EFG International website. So please do go there as well. And of course, we will be doing our roadshows as we normally do in the early part of 2027, and then lots of press interviews, podcasts, and various other things that we will be involved in over the next couple of months. So with that, Daniel, thank you very much for walking through this. I know it's a slightly longer podcast than normal, but the outlook is once a year. So we hope you enjoyed that walkthrough and hopefully you will hear again from us very soon. So with that, thank you.