Elevated crude oil prices driven by geopolitical tensions are unlikely to persist for long, while the artificial intelligence (AI) investment cycle continues to support earnings growth and productivity, according to Mark Matthews, Managing Director, Head of Research Asia at Bank Julius Baer & Co.
Matthews said the current surge in oil prices appears disproportionate to the supply disruption risks and expects prices to moderate over time. He also said the AI-led rally in global equities remains supported by fundamentals rather than speculation. He believes India’s technology sector can adapt to AI despite automation challenges in lower-end IT services.
Matthews noted that nearly 20% of global oil supply passes through the Strait of Hormuz, but said that alone does not justify the sharp rise in crude prices. He added that history suggests geopolitical oil price shocks usually fade within a few months.
Matthews said recent volatility in US equities does not signal the end of the AI investment cycle. He attributed much of the market movement to retail and algorithmic trading rather than a structural shift away from AI-related investments.
According to him, AI continues to drive corporate earnings and productivity. He cited S&P 500 earnings growth of 25-29% this year and said labour productivity in sectors such as information technology, professional services and finance has accelerated since late 2022.
Matthews acknowledged that AI could automate lower-end technology work but said India remains well placed to benefit from the next phase of AI adoption because of its large talent pool and strong mathematical capabilities. “India will find a way to reinvent itself to benefit from AI.”
This is an edited transcript of the interview.
Question
Crude prices have been rising. Crude seems to be flowing freely through the Strait of Hormuz in the Persian Gulf, but prices are very, very elevated, and clearly there is a lot of risk premium attached to them. Prashant was talking about shipping and insurance costs. So how do we get around this? Because for India, crude at $110 per barrel and consistently above $100 is very negative.
Answer:
Yes, and I thought what Prashant said was very interesting and insightful. I don’t have much more to add, except for the fact that the amount of oil that comes out of the Strait of Hormuz is around 20% of global supply. So, I do find it a little odd that even though there are higher costs of taking that oil out in terms of insurance and shipping, for the price of oil to have doubled from basically $60 per barrel to $110 per barrel doesn’t seem right, given that the Strait of Hormuz is only 20% of global supply. We still think that the likelihood is high that the oil price will go down. I can’t predict that, precisely because the politics are very uncertain. But if we look back at history, it is extremely rare for politically related oil price shocks to last more than a few months. They typically resolve themselves, or the price gets so high that it causes demand destruction, and then it goes down on its own.
Question
The other leg of this entire thing is what’s happening in the US on the equity side and in bonds as well. Is this just a regular speculative move and not really a rotation out of US AI, in that sense? Am I right to characterise it like that? That’s what we saw last week?
Answer:
I think so. Two-thirds of the trading activity in the US stock market is retail and algorithmic trading, and it is short-term and valuation-agnostic, and it tends to look more at flows and stories and things like that. So, the AI trade is still on, and the primary reason for that is the impact it’s having on earnings and the economy. I’ll give you two little pieces of data to support that. First, S&P earnings growth is somewhere between 25% and 29% this year. I don’t think anywhere else in the world comes close to that. Second, there was an interesting study of labour productivity in America, and it found that for the sectors of information, professional services, and finance, labour productivity has basically doubled to a 5% rate per year since late 2022. So that is evidence that AI is not a fad. It is having a big, beneficial impact on company productivity and profitability. So, there will be ups and downs in the market, like we saw over the last couple of weeks. But the story is still very much valid.
Question
What about the tech trade? We saw a fair amount of volatility, and we’ve seen some benefit of that in India. Do you think that bounce is also valid, just as the tech trade is valid, despite the volatility? The bounce in Indian software stocks.
Answer:
Yes. There is definitely a problem for India in that a lot of the lower-end work will be automated by artificial intelligence. But I also think if you just look at math scores and the fact that India has 1.4 billion people, many of whom are very adept at mathematics, which is the core language of technology, India will find a way to reinvent itself to benefit from AI.
For the full interview, watch the accompanying video
AI trade is still on, oil price spike unlikely to last, says Bank Julius Baer’s Mark Matthews
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