As competition heats up for your capital, active judgment helps discern risks and rewards

THE 10-year US Treasury yield is again above 5 per cent. Last Thursday (Sep 24), it closed at 5.18 per cent, its highest since 2007.

Any US dollar investor can now earn more than 5 per cent on a Treasury bond without taking equity risk. Any stock that promises investors returns years from now has to offer a compelling reason for them to take that additional risk.

The most interesting test of that hurdle may be artificial intelligence.

AI could transform how we work and how economies grow, but building it requires enormous capital. Money going into chips, data centres and power grids competes with government borrowing and every other investment looking for funding.

If this assists in keeping yields higher, it raises the bar for companies expected to benefit from AI. Their earnings will have to be exceptional – or their share prices more reasonable – to justify taking the risk.

Inflation and interest-rate expectations help explain the 5 per cent, but the world that made capital abundant and cheap is also changing.

In 2005, former US Federal Reserve chair Ben Bernanke called attention to a “global saving glut” – an excess of savings worldwide.

After the global financial crisis, central banks held rates low. Globalisation kept production costs down, as goods and capital moved more freely across borders.

Falling yields lifted bond prices and made future earnings more valuable today. As a result, simply investing in the market through passive strategies often seemed sufficient for investors, resulting in the extraordinary growth of index funds and exchange-traded funds.

Two decades later, the people, economies and technologies behind that arrangement are moving on. Baby boomers are increasingly drawing retirement income. Generation X is still building wealth, though its oldest members are approaching retirement.

Longer lives keep many households saving, so capital has hardly disappeared. But a generation that accumulated substantial retirement savings now needs those assets to do a different job.

At precisely this moment, governments are borrowing more, supply chains are being rebuilt, and AI is beginning an investment programme, the scale of which we are only just starting to appreciate. The competition for capital is now on.

The cost of building AI

Describing AI as a generational investment opportunity may understate what is happening.

Its potential has wide societal reach, changing how knowledge is created and work gets done, from medical diagnosis and education to factories increasingly operated by machines. If the technology delivers, it could lift productivity and reshape economies for generations.

Building that future takes chips, servers, networks, cooling and electricity.

In 2025, the five major technology companies spent over US$400 billion in capex, with a further 75 per cent rise expected this year. Not all of it is AI spending; it also includes its enablers, power grids and industrial automation.

The largest technology companies can fund substantial spending from cash flow. Yet, their ambitions, and those of their suppliers, also draw on debt from bond markets, banks and private capital.

Spending must happen before the full benefits arrive. One company’s capital expenditure becomes another’s order book, but investors must still determine where the profits will ultimately sit. As with any transformative change, it is not going to be a straight line.

The new globalisation story

Silicon Valley is hardly the only one asking for money. For years, businesses organised production around where it was cheapest.

China’s rise has made it a major innovator and strategic competitor to the West. The US and Europe now place greater weight on domestic capacity, security and control over critical technologies.

Globalisation will continue, but its routes, rules and winners are changing. A semiconductor plant may be built where a government considers it strategically necessary, even if another location is cheaper.

Supply chains are being duplicated, defence spending is rising and immigration is more politically contested. These shifts consume capital when governments already carry substantial debt.

For investors, geography becomes part of the investment case: Where a business produces, which markets it can access and in which currency it earns profits can change its economics.

Why this matters for portfolios

Put these developments together, and the pressure on capital becomes easier to understand.

Higher bond yields raise the returns equities must offer to justify their risk. If earnings expectations and share prices do not adjust, the prospective equity risk premium comes under pressure.

At the same time, AI could create earnings and productivity gains that help selected businesses withstand higher yields. Valuations face a tougher discount rate, while technology creates the possibility of stronger growth.

Consider a Singapore investor who owns US technology through an index fund, a specialist fund and an equity-linked note, alongside long-dated Treasuries and Singapore equities, which have been a beneficiary of this AI boom.

These may look like different investments, yet the same rise in yields could weigh on both share valuations and bond prices. Exchange rates then change what those returns are worth in Singapore dollars.

A deep dive to find an attractive investment

Investors need to understand where pricing power sits; which businesses capture profits; which balance sheets can sustain spending; and how much success is already reflected in the price.

Simply owning the largest names tells us little about whether we have paid the right price.

Passive funds remain useful, inexpensive tools. But buying an index means accepting its concentrations and valuations. The rising tide of falling yields that lifted market returns after the global financial crisis may no longer lift every boat.

That makes a stronger case for active judgment in companies, asset classes, currencies and regions. Active funds are no guarantee of better returns. The right managers must demonstrate – after fees – that research, selection and risk management add value.

Good portfolio construction also means recognising risks shared in investments that appear different on paper.

There is plenty to invest in. But capital will no longer be rewarded for simply turning up. The advantage will come from deciding what deserves funding, at what price and for whose needs.

As the world competes harder for our capital, we should demand more of every investment that asks for it.

The writer is head of wealth advisory, OCBC