Marie Owens Thomsen, Indosuez Wealth Management
“Investors should climb the credit ladder to protect themselves,” said Marie Owens Thomsen, global head of investment intelligence at Indosuez Wealth Management, the private banking arm of Credit Agricole, France’s second-largest bank.
Sovereign borrowing, fuelled during the past decade by quantitative easing policies, has reached about $60tn and the bill must eventually be paid, she warned. The US and Japan are most exposed, owing roughly half and a third of the total respectively.
Thomsen attributes the brewing debt crisis to years of “fiscal dominance” to boost economies in the wake of the global financial crisis. The problem is not the size of the debt, but countries’ ability to service it as interest rates normalise.
Bond markets will eventually react to this structural problem, sending yields higher as risks increase and private, corporate borrowing is “crowded out.”
“As a result, investors should be more discerning,” she told sister publication Fund Selector Asia.
“Bond markets will eventually react to this structural problem, sending yields higher as risks increase”
They should focus their portfolios on top quality credits, and take “calculated risks” at the lower end of the credit spectrum to earn incremental yield, and avoid the middle range of credits.
Benign short-term outlook
Nevertheless, Thomsen believes the short-term outlook for both bonds and equities is benign.
She expects a global economic slowdown, but not a recession. Thomson forecasts 3.2% GDP growth this year (compared with 3.4% in 2018) and 3% in 2020, within the potential range of 3%-3.5%.
A low inflation environment created by the structural benefits of globalisation will continue to spur corporate activity and underpin economic growth this year, she argues.
Although she doesn’t rule out the possibility of a US interest rate hike which might jolt markets, she forecasts a 5% rise in global stock markets this year.
“If the US market remains positive, then European and especially emerging market stocks could outperform,” she added.
However, the simmering anxiety about the debt burden in major developed economies will eventually surface, Thomsen said.
“Investors must be constantly aware of the issue, and veer towards safety.”
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