AI investment, government borrowing drive global cost of capital higher: Goldman Sachs

New Delhi: Rising spending on artificial intelligence (AI) infrastructure and higher government borrowing are pushing up the global cost of capital, as companies raise more debt and equity to fund investment while governments increase borrowing for infrastructure, energy security and defence, Goldman Sachs said in a report.

The report said the two major themes dominating investor discussions -- AI and rising interest rates -- are increasingly linked as demand for capital rises across both the private and public sectors.

"In the private sector a surge in capex spending to fund AI infrastructure has eaten into free cash flow and forced companies to raise more in debt and equity markets," the report said, adding that higher government borrowing and inflationary pressures from energy prices have also contributed to the rise in funding costs.


Goldman Sachs noted that 30-year government bond yields in Germany and Japan were close to zero as recently as 2022, while higher yields and greater uncertainty around geopolitics and AI have since increased the cost of capital.

The impact is already visible in corporate financing. Capital expenditure by AA-rated issuers rose 65 per cent year-on-year in the second quarter, marking the 10th consecutive quarter in which aggregate AA capex growth exceeded 35 per cent, the report said.

Companies have also increasingly turned to credit and equity markets to fund the investment. US convertible bond issuance has reached USD 135 billion so far this year, with AI-related borrowers accounting for 44 per cent of the total, according to the report.

Goldman Sachs' credit team has raised its full-year US investment-grade gross issuance forecast by USD 200 billion to USD 2.3 trillion, with AI-related issuers accounting for about a quarter of US investment-grade gross supply this year.

The report added that higher funding costs could put pressure on equities if earnings growth slows. While technology valuations have moderated and are below their 20-year median globally, the key risk is whether the current strength in earnings proves sustainable.

"Nonetheless, any slowdown in profit growth, in an environment of a much higher cost of capital, could put downward pressure on equity prices," the report said.

Goldman Sachs expects earnings growth and nominal GDP growth to remain important drivers of equity performance, while noting that higher bond yields are likely to limit further valuation expansion. The bank said opportunities were broadening across geographies, sectors and factors as earnings growth becomes more widely distributed.