Investment implications for strategic allocations

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.

• Stocks outpaced bonds
• Real assets performed well
• Global stocks beat domestic issued
• 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

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.

• Inflation exposure
• Distressed opportunities
• Equity beta diversification
• Active asset allocation
• Benefits of wealth distribution policies

Five Key Investment Conclusions

Click the link below to read more about the five key investment considerations and how you can strategically position your portfolios for the future.