ChenZhaoLivefromThinkSummit-BeyondtheWarandOilShock

 

Chen Zhao Live from Think Summit - Beyond the War and Oil Shock

 

 

What was discussed

Chen Zhoa: Beyond the War & Oil – The AI Boom, Market Bubbles, and Global Strategy

In this insightful session at the RMB Think Summit, Chen Zhao, Chief Global Strategist, shared his macro-economic outlook on global financial markets, the reality of the AI boom, and what truly drives asset valuations in this decade.

Here are the key takeaways and themes from his address and the subsequent Q&A session:

1. Debunking the Oil Crunch and Recession Fears

The Obvious is Often Wrong: Zhao reminded investors of a core rule: "When everything becomes so obvious, in our business, it is not." At the onset of the recent geopolitical conflict, major institutions (like Goldman Sachs) spiked recession probabilities to 35% due to feared oil shocks. Instead, the global economy saw a simultaneous manufacturing expansion across the US, EU, and China.

Plunging Oil Dependency: Zhao demonstrated that since 2000, the world’s dependency on crude oil (crude consumption divided by real GDP) has dropped dramatically—by nearly 90% in the US, and roughly 65% in China and Europe. Because fossil fuel is now a much smaller part of the economic engine, high oil prices no longer carry the destructive power they once did.

2. The AI Boom: Bubble or Rational Trend?

A Bubble is Constitutional, But We Aren't There Yet: Zhao observed that historically, the US market experiences a massive bubble every decade (e.g., commodities in the 70s, Japanese stocks/junk bonds in the 80s, the dot-com crash in the 90s, housing in the 2000s, and government bonds in the 2010s). While an AI-driven bubble will happen this decade, we are currently in a fundamentally supported "AI boom" rather than a bubble.

The 1990s vs. Today:

The 90s Dot-Com Bubble: Driven entirely by P/E multiple expansion while corporate profits were actually contracting.

The Current AI Boom: Driven entirely by robust profit growth. P/E multiples have remained relatively flat or slightly compressed since 2021, while corporate profits have

grown by 12–13% per annum. The market is behaving highly rationally, severely punishing companies that miss earnings targets.

Healthy Capital Returns: Despite massive capital expenditure on data centres (roughly 50billion/monthor600 billion/year by the "Magnificent Seven"), realised capital returns remain strong, showing no clear signs of over-investment yet.

3. The Macroeconomic Impacts of AI

Pro-Profit over Pro-Labor: Unlike the 1990s internet boom where productivity gains were shared somewhat between corporations and labour compensation, the current era has seen US productivity grow by over 20% while real labour compensation has stagnated. This means corporations are capturing almost 100% of AI-driven productivity gains.

Disinflationary Forces: Zhao predicts that once the temporary noise of the oil shock clears, AI’s massive productivity gains will prove highly disinflationary, pushing global inflation much lower over the next few years than the consensus expects.

4. Forward-Looking Investment Strategies (Next 3 to 5 Years)

The AI Playbook: Zhao advises investors not to fear high-flying tech stocks just yet. He suggests buying on any market shakeouts, as the AI story is far from over.

Sectors to Watch:

Industrials: The massive power demand created by AI and data centres has exposed severe electricity shortages. Regulated prices are climbing, indicating a critical need for new infrastructure. Zhao favours industrial giants like Caterpillar, noting, "You need a lot of bulldozers to build all those power plants."

Commodities: Pointing to a 100-year historical chart, Zhao highlighted that commodities run in strict 10-year up-and-down cycles. We are currently only in year three or four of a secular commodity bull market. Gold, in particular, has room to run.

The Barbell Approach: For fund managers, Zhao recommends a "barbell strategy"—keeping a solid allocation in high-growth AI and tech, balanced on the other side by undervalued value stocks and commodities.

5. Q&A Highlights: China and Sovereign Debt

The Chinese EV Paradox: While China has achieved absolute global dominance in EV production, Zhao warned that its economic model does not prioritize profit maximization like the US. With 200 domestic EV makers fiercely competing, the entire Chinese EV industry makes less profit than Toyota alone. Consequently, China is a great industrial story, but not necessarily a great equity profit story.

No Sovereign Debt Equity Meltdown: When asked if high levels of global sovereign debt risk crashing the bond market and triggering an equity meltdown, Zhao dismissed the concern. With nominal US GDP and bond yields balanced at 4.5%, the relationship is in equilibrium. Zhao concluded that current borrowing costs are healthy and do not pose an imminent systemic threat to global equities.