Investing

From quill to quantum: Why letters still matter in the age of AI

02 Feb 2026 . 15 minutes

In the first of a new series of monthly letters from our Chief Investment Officer, Fahad Kamal covers the power of letters, our latest market views, and recent changes to our positioning.

In my inaugural monthly communication, I cover:

The Coutts view

We’re using the power of letters to keep you close to the factors driving your investments. From economic acceleration to changes in our asset allocation views, our regular updates will keep you informed.

Strength in communication in 2026

The potential for strong company earnings is generating ongoing opportunities in the technology sector – a central industry for modern communication. This could push equity markets higher in 2026.

Upgrading our views on emerging markets and gold

Our rigorous internal investment processes have led us to revisit our views in two key areas. Within our asset allocation framework, we’re upgrading our views on emerging market equities and gold.

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs. This article should not be taken as advice.

Dear reader,

You’ll often hear letter writing described as a lost art. I disagree, and I hope you do too. It’s my privilege to lead the investment team, and I believe in the power of writing letters.

Letters have helped us build relationships with our clients for centuries. In the early 1700s, one of our bank’s first partners, George Middleton, wrote to a client, “There is nothing in my power that I will not do for your service.”

I can say with some certainty that – unlike me – George did not send his heartfelt declarations by email. His original letter is still here, tucked away in the Coutts archives. Delivery methods may have evolved, but my sentiments remain the same.

Ink and artifice

Since our bank’s earliest days on the Strand in London in 1692, we have been writing to clients across the UK, and the wider world. In the 1700s and 1800s, when global travel took off, Coutts’ letters of credit and introduction opened doors for our clients whenever they travelled overseas.

Because written correspondence was so vital, our letters were handwritten by teams of clerks whose handwriting was regularly checked for legibility. Letters were only ever signed by the bank’s partners.

A letter signed by Thomas Coutts, one of the bank’s early partners

We’re still on the Strand, and our clients are still all over the world. Thanks to substantial changes in how people, institutions, and businesses communicate, I no longer need to ask a large team of clerks to copy out my words to you. Indeed, at the rate the world is going, my letters may well be checked over by computers instead!

These advances have also created a very specialised set of winners in equity markets. Many of the most valuable companies today are closely linked to (if not embedded in) communications, and in providing the technology that is connecting and automating the world.

This focus on communication and efficiency has led to surging investment in artificial intelligence (AI). As investors have embraced the transformative potential of AI technology, equity prices for AI-related firms have repeatedly pushed equity markets to new highs.

In 2025, landmark deals in data infrastructure and semiconductor manufacturing fuelled further investor optimism. 2026 is set to take this further, as the year in which AI could deliver on its potential by becoming more widely embedded in the real economy.

In turn, this creates scope for the earnings and growth benefits associated with AI to be extended to companies beyond the technology and communications sectors. As the chart below demonstrates, this wider adoption of AI has already begun to take off. Our analysis indicates that this is the foundation of a trend that could build up much further from here.

From niche to newsworthy

Historically, the US economy has been driven by US consumers. But in 2025, capital expenditure on AI contributed as much to US GDP growth as consumer spending, despite representing only 6% of GDP compared to 70% for the consumer.

Such rapid growth in what was once a niche area for technology has caused occasional market volatility, due to concerns of a bubble in equity valuations. These market wobbles have so far been brief and have tended to relate to news flow centred on individual companies. They have done little to dampen enthusiasm for investment in the AI theme. For long-term investors, the sector’s promise appears to outweigh any near-term bouts of price volatility.

Although AI cannot (yet!) predict the future, our analysis indicates that the benign loop between investment and growth in AI has further to go. We believe that continued capital expenditure in this area has the potential to boost productivity and continue to drive corporate earnings higher in 2026.

Expect more growth, fewer rate cuts

For corporate earnings to be sustainable across a broad base, economic growth is critical. In turn, economic growth is dependent upon one of two factors: an increase in the human population (creating a larger workforce, and more consumers), or an increase in productivity (allowing the workforce to deliver more).

Current demographics are unfavourable in many of the world’s largest economies, and productivity growth has been anaemic for some time. Together, these realities have hindered the economic outlook. However, AI has the potential to bolster productivity gains into the future, supporting the case for improved economic growth ahead.

Our research shows that the global economy is now accelerating. The longest US government shutdown on record delayed the release of critical US economic data in the later months of 2025, but across most global regions, data has been more positive than economists expected.

This momentum is being driven by the service sector as well as continued growth in AI-related spending. In the US in particular, AI spending has been higher than market analysts have predicted. The US financial sector has also benefited from increased dealmaking and trading revenue.

Meanwhile, with 2026 now in full flow, market prices – particularly in bond markets – show that investors expect substantial interest rate cuts this year from the US central bank, the Federal Reserve (Fed). According to our analysis, they may be disappointed. It’s our view that the strength of economic growth will likely limit the number of interest rate cuts in 2026 by the Fed, which has never before cut rates when the US economy is in an expansionary economic period.

This is not bad news. If the Fed makes fewer rate cuts than investors expect this year, it’s because it believes that the economy is already robust enough and does not need further support. By extension, this points to a lower risk of economic recession. A lower risk of recession is good news for shareholders, as it creates better prospects for company earnings and could help the performance of riskier assets such as equities.

It won’t all be plain sailing, and we’re aware that we are operating in an environment of heightened risks, including increasingly complex geopolitics, often with the US as a pivotal participant. If you’re interested in reading more about our views on the market’s typical response to geopolitical incidents, you might find my colleague Joe Aylott’s article enlightening: CIO Update - Geopolitics: Why we focus on fundamentals, not headlines.

Domestic factors, such as the White House’s interest in influencing the Fed, and pushing for more interest rate cuts, also add some uncertainty to this scenario. However, despite the media noise, we’re still of the belief that adequate checks and balances remain in place to protect the independence of the US central bank.

We’re also aware of weakness in US employment markets, where growth in wages has been slowing since 2022. Nevertheless, for now, the picture for US consumers remains healthy, and as I noted earlier, productivity – a significant driver of wages over time – has been trending upwards after years in the doldrums.

Our key investment views

Bonds are not offering enough, we prefer equities

Interest rate cuts – in the pipeline for 2026 – normally spell good news for bonds. However, the end of an interest rate cutting phase has historically created challenges for the performance of government bonds. Since we’re not convinced that rates will fall by as much as many analysts expect, we don’t expect bonds to perform as well as equities over the coming months.

Our view includes not only government bonds, but also traditionally riskier areas of bond markets such as corporate debt (credit). In our view, most areas of credit markets do not currently offer significant financial reward in exchange for taking on the necessary higher risk.

The wider economic outlook is also highly relevant to this view. Our proprietary analysis signals that the economy is transitioning to a phase of expansion. This has become increasingly evident following the end of the US government shutdown, which had delayed the release of crucial economic data. The subsequent economic data updates have confirmed our view.

Periods of economic expansion have historically been associated with stronger performance for riskier asset types such as equities, while bonds have underperformed by comparison.

In a nutshell: Our analysis indicates a better environment for equities than bonds. In our model portfolios, we have increased the extent of our underweight to bonds versus our benchmark allocations.

Finding diversification in gold and ‘liquid alternatives’

With bonds and equities often rising and falling together, we believe bonds have lost some of their diversification benefits for the time being. In this environment, a more holistic approach to diversification among investments is required.

With this in mind, we are upgrading our views on ‘alternative assets’ (i.e. beyond traditional bond and equity markets). This should help us to enhance our resilience to idiosyncratic shocks.

As a result, we’re updating our view of gold – one of the world’s oldest tradeable alternative assets. Gold is a traditional ‘safe haven’ for investors, and historical analysis shows that its addition could bring diversification benefits to an investment portfolio. It has historically performed well in response to major geopolitical shocks, government policy surprises and persistent inflation.

Key factors driving gold’s performance today include high volumes of buying by central banks, a broadening investor base, and its use as a store of value amid rising government deficits.

While this is a newly updated view, gold is not the only ‘alternative asset’ highlighted by our internal analysis. We continue to like ‘liquid alternatives’, although they are not suitable for all clients or circumstances. These specialist investment strategies can use a broader range of techniques than traditional financial assets. This includes short selling, which aims to benefit from falling asset prices. They can also use tools which aim to limit financial losses in exchange for giving up some potential gains.

In a nutshell: We’ve upgraded our view on gold due to its diversification benefits. We have initiated a new position in gold.

A new preference for emerging market equities

For the first time in a number of years, our regional analysis has revealed growing opportunities in the equity markets of emerging market (EM) economies. Equity prices in these regions tend to perform well during periods of economic expansion and recovery.

As the global business cycle heads towards expansion, EM economies could benefit. Over the past 12 months, almost all major EM equity markets have delivered strong price performance, including regions such as Latin America.

EM businesses are also exposed to attractive global growth trends, especially in technology-heavy economies such as South Korea and Taiwan. Investing in EM could create exposure to the AI theme, with better diversification than a purely US-centric approach.

Equity valuations relative to company earnings are currently lower in EM economies than in the US, and the outlook for growth in these companies’ earnings is attractive. The export market for the semiconductors – so critical to the AI revolution – is predicted to remain elevated in 2026, potentially supporting the earnings outlook for EM chip producers.

Historically, weakness in the US dollar has been helpful for EM equity performance. Many EM countries and businesses issue their debt in US dollars, meaning that debt-servicing costs fall when the dollar is weaker. A weaker dollar could also attract greater investment and stimulate economic and corporate growth. While a weaker dollar is not central to our view on EM equities, it provides a helpful backdrop.

In a nutshell: Our analysis has signalled a potential opportunity in EM economies. We have moved EM equities to a new overweight position versus our benchmark allocations.

Keeping you informed

This is the first letter I’ve sent to you, but it won’t be the last.

We know that for communication to be useful and effective, it needs to be valuable and relevant. In this age of social media and information overload, we are careful in our communications with our clients.

As part of the regular updates from my team that are relevant to your investment service, every month you’ll receive a letter like this from me to ensure you understand our core views.

Like George Middleton, one of Coutts’ earliest partners, there is nothing in my power that I will not do for your service.

Yours sincerely,

Fahad Kamal

Chief Investment Officer, Coutts

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