BlackRock warns on inflation and AI risks

• Investors ‘can’t just rely on the Fed’
• AI boom makes diversification tricky
• But it also drives deals for energy

Inflation will remain “a problem” well into next year and investors should brace themselves to operate in a “complicated macro backdrop”, the Middle East chief of the world’s largest asset manager has told AGBI.

“You can’t be what people used to call ‘risk-on’,” said Ben Powell, chief Middle East and Asia-Pacific strategist at the BlackRock Investment Institute. The US Federal Reserve is unlikely to deliver many rate cuts in 2026, he added, and global investors “can’t just rely on the Fed to lift all markets”.

Powell also said the AI super-boom would remain “front and centre”. But investment decisions need to take into account the concentration of AI-heavy stocks in the US equity market.

Just 41 AI-related businesses – about 8 percent of the S&P 500 – account for 47 percent of its total market capitalisation, according to JPMorgan.

“Diversification is hard to achieve these days,” Powell said, arguing that portfolios must look beyond the handful of mega-cap AI winners.

Their dominance has been fuelled by a surge of deals deepening the relationships between AI companies. These have amplified optimism about the sector as well as fears that it is another bubble.

AI company Anthropic has secured major backing from the tech giants Microsoft and Nvidia while simultaneously promising to spend tens of billions on compute capacity from the two companies.

In November OpenAI signed a $38 billion agreement to use cloud-computing platform Amazon Web Services, expanding its already deep infrastructure ties.

Cloud-computing specialist CoreWeave, meanwhile, has locked in multi-year, multibillion-dollar contracts with several leading AI labs.

Critics say such “circular” financial relationships are reminiscent of bubble dynamics. Powell disagrees. “It’s very normal,” he said.

Capital-intensive sectors such as energy, automotive and semiconductors routinely have intertwined financing and supply arrangements, said Powell. 

What sets AI apart is the speed. “The pace is somewhat bewildering, but in terms of the financing structure, it is surprisingly normal when you look at other capital-intensive industries.”

BlackRock’s own preference, Powell added, is to invest against a backdrop of “fear and sadness” rather than the excitement that surrounds AI.

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Despite concerns that many companies experimenting with AI are yet to generate meaningful profits, he is optimistic about the fundamentals.

“We can debate valuation, but there’s obviously real revenue, real cash flow and real earnings being made. We still think these big American companies are cheap stocks driven by fundamentals.”

The AI boom extends far beyond Silicon Valley, drawing capital to the regions that are building and powering the physical AI infrastructure – including the Middle East.

International investors have deployed roughly $50 billion into Saudi Arabia and the UAE in recent years, backing mega-projects that range from OpenAI’s planned Stargate computing complex in the UAE to Google and Saudi Arabia’s Public Investment Fund’s new cloud hub. 

In renewables, solar module fabricator JinkoSolar’s 2024 joint venture in Saudi Arabia highlights how the low-carbon transition is now tied to local manufacturing and technology transfer.

“AI isn’t just the tech,” Powell said. “It’s the associated energy that’s required to power the tech, which brings us to the region directly.” 

Watch the video to find out about BlackRock’s views on crypto as a portfolio diversifier