AI Investment, Government Borrowing Drive Up Global Cost of Capital: Goldman Sachs
Goldman Sachs has released a report highlighting the impact of rising spending on artificial intelligence (AI) infrastructure and government borrowing on the global cost of capital. According to the report, demand for capital is increasing across both private and public sectors, forcing companies to raise more debt and equity to fund their investments.
The surge in capex spending to fund AI infrastructure has eaten into free cash flow, resulting in higher funding costs. Additionally, government borrowing and inflationary pressures from energy prices have contributed to the rise in funding costs. For instance, 30-year government bond yields in Germany and Japan were close to zero as recently as 2022, but have since increased due to geopolitical uncertainty and AI-related risks.
The report notes that corporate financing is already being impacted by these trends. Capital expenditure by AA-rated issuers rose 65% year-over-year in the second quarter, marking the 10th consecutive quarter where aggregate AA capex growth exceeded 35%. Companies are increasingly turning to credit and equity markets to fund their investments, with US convertible bond issuance reaching $135 billion so far this year, with AI-related borrowers accounting for 44% of the total.
Goldman Sachs' credit team has raised its full-year US investment-grade gross issuance forecast by $200 billion to $2.3 trillion, with AI-related issuers accounting for about a quarter of US investment-grade gross supply this year. The report warns that higher funding costs could put pressure on equities if earnings growth slows.
Nonetheless, the bank expects earnings growth and nominal GDP growth to remain important drivers of equity performance. However, it notes that higher bond yields are likely to limit further valuation expansion.