Morgan Stanley believes that a surge of corporate borrowing is coming as artificial intelligence ignites what may be the largest capital spending cycle in more than a century.
In a new episode of Morgan Stanley’s Thoughts on the Market podcast, Andrew Sheets, the bank’s head of corporate credit research, says that easing financial conditions and massive AI investment are setting the stage for a sharp jump in debt issuance across US investment-grade markets.
“Corporates have been impressively restrained over the last several years. They’ve really kind of held back despite lots of fiscal easing, despite very low rates. Those reasons for waiting are falling away.
And so in this backdrop… around easier monetary policy, easier fiscal policy, easy regulatory policy, and just for good measure, maybe the biggest capital spending cycle since the railroads through AI, these are some pretty powerful forces of animal spirits. That’s a reason why we think ultimately we see a lot more issuance. We see roughly a trillion dollars of net supply… That’s a huge uptick from this year.”
But Sheets warns that the staggering amount of lending could pave the way for a new risk in the financial market.
“The other risk to growth is just around this AI-related spending. It is very large. And the companies that are doing it are some of the wealthiest companies in the world. And they see this spending potentially as really core to their long-term strategic thinking. And so if you were to ever have an issuer or a set of issuers who were just less price-sensitive, who would keep issuing into the market, even if it was starting to reprice that market and push spreads wider, this might be the group.
And so a scenario where that spending is even larger than we expect, and those issuers are less
price sensitive than we expect, that could also drive spreads wider, even if the underlying economic backdrop is somewhat OK.”
In November, JPMorgan predicted that investment-grade bond issuance would surge to an all-time high of $1.81 trillion next year, driven by heavy AI spending, lower rates and dealmaking. And in the same month, Hirtle, Callaghan & Co, which oversees $20 billion in assets, warned that debt holders of the AI boom will eat losses if capacity outpaces demand.
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