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Unprecedented global debt levels poised to rise
The inexorable trend of rising global debt to gross domestic product (debt/GDP) is becoming one of the single biggest risk factors in investment portfolios. High and rising debt levels are unprecedented—the next decade may look very different from recent history and existing long-term averages. This has important implications for both governance and long-term strategic asset allocations decisions.
Our research examines the etiology of the mounting debt crisis and the path toward monetary and fiscal policy experimentation that likely lies ahead. More important, we uncover specific allocation considerations for capitalizing on the opportunities presented by the debt predicament.
Current Regime: Why Debt Is Rising
Unprecedented global debt levels among the world's largest economies are fast becoming the most substantial risk in the investing world today. This risk has been brewing for decades.
Global Public and Private Debt as a Share of World GDP
Source: "Macrofinancial History and the New Business Cycle Facts" by Òscar Jordà , Moritz Schularick, and Alan M. Taylor (2017). Jordà-Schularick-Taylor Macrohistory Database, World Bank, International Monetary Fund, Bank for International Settlements, Fidelity Investments (AART), as of 12/31/18.
Unsustainable: Why Debt Will Continue to Rise
Global debt levels are poised to rise significantly during the next decade, and that is ultimately unsustainable. Worsening demographics, de-globalization trends, unintended consequences of easy monetary policies, and more will likely contribute to the sluggish growth.
Public Debt/GDP Actual vs. Forecasts
Source: International Monetary Fund, United Nations, Fidelity Investments (AART), as of 5/31/20.
Policy Outlook: Greater Policy Experimentation Ahead
Rising global debt will lead to greater fiscal and monetary policy experimentation, which will be likely be the catalyst for a shift to a more inflationary investment environment.
Tools Employed by High-Debt Countries
Source: IMF working paper "A Modern History of Fiscal Prudence and Profligacy," by Paolo Mauro, Rafael Romeu, Ariel Binder, and Asad Zaman (2013), DMS, Fidelity Investments (AART) as of 3/31/20.
Investment Implications for Strategic Allocation
Rising global debt will likely have a profound impact on the outlook for long-term asset class performance. This outlook may warrant specific changes to both governance and strategic asset allocation decisions.
Global Public and Private Debt as a Share of World GDP
Source: IMF working paper "A Modern History of Fiscal Prudence and Profligacy," by Paolo Mauro, Rafael Romeu, Ariel Binder, and Asad Zaman (2013), DMS, GFD, Fidelity Investments (AART) as of 3/31/20.
Unsustainable Global Debt:
Roadmap for Strategic Asset Allocation
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- Diversification and asset allocation do not ensure a profit or guarantee against loss.