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.

1

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

PrivatePublic0%50%100%150%250%200%19011929195819872017
2

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

In 20 YearsNow0%150%100%50%200%250%300%350%400%JapanSpainFranceGermanyUKU.S.ItalyHighest on record
3

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

Debt declined (success)Debt rose (failed)Debt unchanged2 TOOLSNO TOOLS1 TOOLU.S.1946Japan1942Belgium1940New Zealand1909Ireland1986Canada1995Germany1918Italy1992Belgium1983UK1918Netherlands1932Italy1919Italy1942France1940Canada1932Japan1997Inflation+ FiscalFiscal + GrowthInflation+ GrowthFiscalInflationGrowthNone
4

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

12%10%8%6%4%2%0%High InflationLow InflationTotalNegativeAbsolute BondReturns in8 of 9 EpisodesStocks > Bonds83% of Episodes

Unsustainable Global Debt:
Roadmap for Strategic Asset Allocation

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