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Diversification of revenue sources
We don't know with certainty the future path of growth, inflation, policy, or debt levels for the world's high-debt countries; however, the historical case studies we analyzed revealed the following about how assets performed in the decade after the move into high-debt territory.
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Stocks outpaced bonds
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Global stocks beat domestic issued
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Real assets performed well
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Stock-bond correlations heightened
For the cases we analyzed, equity markets outpaced domestic bonds by an average of 6.6% per year in inflation-adjusted dollar terms, outperforming in 15 of 18 historical cases; bond markets suffering absolute negative returns in eight of the nine high-inflation episodes. When compared to global stock returns, the equity markets of high-debt countries tended to underperform by an inflation-adjusted 4.5% per year.
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.
While history serves as a partial guide at best, these historical episodes of high-debt countries and the application of wealth redistribution policies underscore a broad need for considering strategic asset allocation strategies that seek a greater diversification of return sources than normal.
Five Key Investment Conclusions
We feel there are five key investment considerations of rising debt that should be critically evaluated as part of the strategic allocation and plan governance of institutional portfolios.
- Inflation exposure
- Active asset allocation
- Distressed opportunities
- Benefits of wealth distribution policies
- Equity beta diversification
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Rising debt will likely have a profound impact on the outlook for long-term asset performance. We offer five considerations for achieving a high degree of diversification while retaining exposure to potential beneficiaries of government policies.
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Rising debt will likely have a profound impact on the outlook for long-term asset performance. We offer five considerations for achieving a high degree of diversification while retaining exposure to potential beneficiaries of government policies.
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Rising debt will likely have a profound impact on the outlook for long-term asset performance. We offer five considerations for achieving a high degree of diversification while retaining exposure to potential beneficiaries of government policies.
Rising Global Debt: Five Key Investment Conclusions
Rising debt will likely have a profound impact on the outlook for long-term asset performance. We offer five considerations for achieving a high degree of diversification while retaining exposure to potential beneficiaries of government policies.
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.