Research

Unsustainable global debt: Roadmap for strategic asset allocation

Unprecedented debt levels among the world's largest economies are fast becoming the most substantial risk in the investing world today. This risk has actually been brewing for decades.

By: Vadim Zlotnikov Dirk Hofschire

Updated: 10/6/2020

Key Takeaways

A confluence of political, economic, and social forces has both fostered and enabled the use of debt as a panacea for economic ills. Global levels of debt to gross domestic product (debt/GDP) are already unprecedented, are poised to rise significantly during the next decade, and are ultimately unsustainable.
Prudent long-term investment governance must explicitly consider the impact of rising debt on capital market prices, as well as possible “endgame” scenarios.
As policymakers engage in even greater monetary and fiscal policy experimentation, winners and losers become heavily linked to policy choices.
Past episodes of high sovereign debt often resulted in greater inflation. Bolder policies, amid circumstances that have changed significantly over the past decade, are likely to generate a higher probability of inflationary outcomes.
Reflationary policies could take the form of wealth redistribution, industrial policies accompanied by massive fiscal investment, and/or attempts to raise inflation expectations. These choices and the magnitude of the response to them will have profound implications for asset prices and the nature of future market dislocations.
Investment committees are facing uncomfortable choices in designing long-term strategic allocations. In this report, we offer five specific considerations for achieving the highest degree of diversification while retaining exposure to potential beneficiaries of government policies.

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Unsustainable Global Debt: Roadmap for Strategic Asset Allocation