The global capital system is undergoing an unusual stress test. The source of the test is not singular; rather, three forces are converging within a similar time window: the impact of Middle East conflicts on energy and shipping routes, the market’s reassessment of the path to returns on AI-related investments, and the continually accumulating liquidity mismatches in private credit and private equity markets. The Reserve Bank of Australia’s March 2026 *Financial Stability Review* described the current environment as “rapidly evolving” and “elevated risk.” Behind this assessment is a shift in the logic of global capital allocation from the old paradigm of low interest rates, underpriced volatility, and asset-light models toward a new paradigm of high interest rates, high-frequency shocks, and asset-heavy models.
The Nature of the AI Capital Cycle Has Changed
Over the past few years, AI has been one of the main supports for equity market valuations in advanced economies. But from the second half of 2025 to early 2026, investors began to reassess this narrative. The direction of that reassessment is not that “AI does not matter,” but that “AI’s financing structure and competitive landscape may be more complex than expected.”
Two pressures emerged simultaneously. On the one hand, AI-driven competition is disrupting the business models of some software companies, leading to pronounced repricing of the share prices and credit spreads of the companies involved. On the other hand, AI infrastructure construction—data centers, compute clusters, and energy support facilities—requires enormous capital and increasingly relies on debt financing, especially large-scale bond issuance by major hyperscale enterprises. This means the AI capital cycle is no longer just an equity market story, but is deeply tied to the credit market.
This shift has direct implications for global capital flows. When the marginal source of funding for AI investment shifts from retained earnings and equity financing to debt financing, fluctuations in the interest rate environment, credit spreads, and refinancing windows are transmitted more quickly to the pace of AI infrastructure investment. For economies seeking to attract FDI by taking on data center, energy, and semiconductor support projects, the certainty of capital availability is declining.
The Exit Predicament in Private Markets and the Ebbing of Liquidity
As of September 2025, global private equity assets under management reached $10.9 trillion, but the pace of fundraising slowed significantly over the past two years. More noteworthy is the exit side: the average holding period for buyout funds has extended from about five years in 2010 to about seven years in 2025. Delayed exits mean capital cannot be returned to fund investors in a timely manner, thereby constraining their ability to redeploy it.
To ease liquidity pressure, some fund managers have turned to alternative exit solutions, including selling partial stakes, setting up continuation funds to acquire assets from existing funds, and in some cases introducing leverage. Such practices ease capital return pressure in the short term, but may also push risks into the future and increase opaque linkages between private markets and the broader financial system.In September 2025, the defaults of First Brands Group and Tricolor provided a window for observation. Although investors generally viewed them as idiosyncratic events, bank-reported exposures to direct loans, credit funds, and warehouse financing led to more than $1 billion in write-downs. Subsequently, related exposures at UK mortgage lender Market Financial Solutions drew renewed attention. The common feature of these cases is that the links between non-bank credit providers and the broader financial system are not transparent, while private credit exposure to valuation-stressed industries such as software is rising.
The Bank of England’s systemic exploratory scenario testing, launched in December 2025 and expected to publish results in early 2027, is the latest attempt by global regulators to deepen understanding of this area. For investment research, the key question is: if a valuation adjustment in private markets occurs, will its speed and magnitude exceed the expectations implied by current risk premiums?
The Resilience of Trade-Flow Adjustment and the Lagged Pressure of Energy Costs
An underappreciated positive signal is that over the past year, global trade flows have adjusted relatively quickly to tariff changes, and corporate profit margins and cash buffers in advanced economies have generally remained healthy. Earnings results across most sectors in Europe and the US were better than expected. This suggests that global supply chains have a degree of adaptability, and companies have built up buffers over the past few years.
But this resilience has limits. Persistently high energy prices will exert pressure in two directions: first, by restraining demand growth; second, by raising input costs and squeezing profits. The reference material specifically notes that upward revisions to technology companies’ earnings expectations have masked weak forecasts for industries more exposed to tariffs, such as automaking, durable consumer goods, and energy, especially in the US. This means sector divergence in capital markets may further intensify.
For corporate balance sheets, median leverage has risen in most advanced economies, but interest coverage ratios have also risen, indicating that debt-servicing capacity has not deteriorated in tandem with leverage. However, speculative-grade debt default rates remain elevated in Europe and the US, and are dominated by out-of-court debt restructurings, creating a risk that companies will default again if underlying problems are not resolved.
Sovereign Bond Markets Are Becoming a New Valuation Anchor
Government bond yields remain above their 10-year averages, partly reflecting market concerns that issuance will remain persistently high. After the escalation of conflict in the Middle East, investors reassessed monetary policy and fiscal prospects, and sovereign bond yields and volatility indicators rose in tandem. Although term premiums remain within historical ranges and market functioning remains normal, the repricing of long-end risk-free rates is transmitting to all asset classes.
As of October 2025, more than $1.5 trillion of speculative-grade debt in the US and Europe—including bonds, loans, and revolving credit facilities—is still due to mature by the end of 2028. If global financial conditions tighten significantly during this period, weaker companies’ refinancing plans could be affected. The existence of this refinancing wall makes the sovereign bond market not only a barometer of fiscal policy but also a key variable in the corporate credit cycle.For global FDI and cross-border investment allocation, rising long-term risk-free rates mean higher project discount rates and greater demands from capital for certainty. This may favor investment destinations with stable regulation, controllable energy costs, and reasonable geographic concentration of supply chains, while putting pressure on regions with high leverage, high energy dependence, or elevated policy uncertainty.
Long-Term Implications for Investment Allocation
At present, the surface of the global financial system remains resilient: systemically important banks remain profitable and adequately capitalized, equity and credit risk premiums remain low by historical standards, and market functioning has not experienced systemic disruption. But the changes taking place beneath the surface deserve continued attention.
First, the growing linkage between the AI capital cycle and credit markets makes technology investment more susceptible to fluctuations in financial conditions. Second, liquidity mismatches and delayed exits in private markets may amplify volatility during valuation adjustments. Third, the impact of energy and geopolitical risks on supply chains is shifting from short-term shocks to medium-term changes in cost structure. Fourth, the repricing of sovereign bond markets may reshape global capital’s criteria for evaluating long-term projects.
For investment promotion agencies and multinational enterprises, this means reassessing the resilience of investment projects’ financing structures, sensitivity to energy costs, and geographic layout of supply chains, rather than only traditional market size and labor costs. Marginal changes in global capital flows often first appear in financing conditions and risk pricing, rather than in output data.