Fokus auf Fundamentaldaten in einer mit Schulden überladenen Welt

Salman Ahmed, Global Strategist & Portfolio Manager (Lombard Odier) und Prof. Stephen Satchell, PhD (University of Cambridge) analysieren, worauf man als Fixed-Income Investor in einer zunehmend mit Schulden überladenen Welt achten sollte. Lombard Odier Investment Managers | 01.04.2015 10:30 Uhr
©  Sergey Nivens - Fotolia.com
© Sergey Nivens - Fotolia.com
Archiv-Beitrag: Dieser Artikel ist älter als ein Jahr.

From one pocket to another – Passing the ever-growing debt parcel

Over the 2007-2014 period, just five economies (Israel, Egypt, Romania, Saudia Arabia and Argentina) out of a total 47 (based on data compiled by the McKinsey Institute), saw their total debt to Gross Domestic Product (GDP) burden fall. Of these five, two were forced to de-leverage (Egypt and Argentina), while the remaining three voluntarily cut their debt burden. 

In the case of advanced economies such as the US and UK, total debt burdens increased, despite the fall in household and financial sector deleveraging. This net increase was driven by the sharp re-leveraging of the public sector which more-than-offset the private sector’s decrease. Over the seven years through 2014, for instance, total debt-to-GDP rose 16 percentage points in the US and by 30 percentage points in the UK, despite the respective -20 percentage point and -30 point de-leveraging recorded by the corporate and household sectors. Extraordinarily, the US and UK’s increases in total-debt-to-GDP were relatively modest compared with Italy (55 percentage points), Japan (64ppt), France (66ppt), Sweden (68ppt), Greece (103ppt), Singapore (129ppt) and Ireland (172ppt).

In emerging economies China’s total debt-to-GDP ratio increased by 83 percentage points over the seven years, led by a sharp increase in corporate sector’s debt burden. Indeed, since 2007, China’s total debt has nearly quadrupled from $7.4 trillion to $28.2 trillion and now represents around 282 percent of GDP according to McKinsey estimates. The debt concentration in local government and real-estate sectors are well-known areas of concern for China and have been a subject of intense debate in both policy and investor circles.

For some countries, an unusually high debt-to-GDP ratio doesn’t signal imminent crisis. In China, the liquidity and size dimensions of foreign exchange reserves and relatively low public sector debt burden (55 per cent of GDP) means that the implications of the leveraging seen in recent years are much more nuanced, given the strong ties between public and private sectors. Similarly, the rise in debt burden seen in countries such as the US and UK, compared with countries such as Greece, have different implications given the size of the economies, relative to global GDP, and direct ownership of monetary policy. The ability to determine your own monetary policy is key as it implies non-political access to the lender of last resort (the central bank).

Despite the sharp increase in leverage seen over the last seven years, the average debt-to-GDP ratio for the emerging markets universe in the second quarter of 2014 was 121 per cent compared with an average of 280 per cent for advanced economies, suggesting that there are significant differences between the debt profiles of the two universes.

All in all, the clearest response to low growth since 2007 has been more public-sector debt. And while this is true for the vast majority of major advanced and EM economies, what stands out is the significant differences between them (see chart 1 & 2 for details). 

Chart 1: The ratio of debt to GDP has increased in all advanced economies since 2007

Zum Vergrößern bitte auf den Chart klicken!
Zum Vergrößern bitte auf den Chart klicken!
Zum Vergrößern bitte auf den Chart klicken!
Zum Vergrößern bitte auf den Chart klicken!

The extraordinary global easing of monetary policy since 2008/9 has increased the influence of policy makers on the cost of money to unprecedented levels. Textbook analysis shows that managing the cost of money through the business cycle can mitigate shocks to aggregate demand. And during phases of monetary policy easing, wealth is transferred from savers to borrowers in a bid to reignite consumption and investment.

This wealth transfer, in the era of quantitative easing-based monetary policy, uses both price and excess quantity of money signals. In response, depressed risk-free rates force investors to take on more risk to meet their return targets.

As QE impacts debt burdens, it’s perfectly logical to see debt ratios rise as interest rates fall in line with the wealth transfer mechanism. But what’s less logical is the rise of the public sector as the key borrower in a number of advanced and emerging economies, while economic growth and inflation outcomes stay subdued.

Government suppression of the cost of borrowing has huge implications for risky assets, especially in an era where debt burdens are likely to continue rising.

The force of fundamentals in an indebted world

In a world of excess debt and weak growth, we think it’s key to use the information in the underlying fundamentals of individual countries when building exposure to sovereign fixed income. Unlike market-cap benchmarks, which give the highest weight to the most leveraged borrowers, or in other words reward the ability to borrow, we believe that a fundamental approach shifts the focus to the ability to pay. Indeed, we think that the ability to pay will prove to be more important than capacity to borrow, when today’s artificially low interest rate cycle turns.

Take, for instance, the example of Japan. Over the last seven years, total debt-to-GDP has increased by 64ppt to 400 per cent of GDP (highest total debt burden in the world). In terms of sector contributions, most of that increase came from the public sector as weak economic growth and an aging population weighed on welfare. On the policy front, massive quantitative easing may take the Bank of Japan’s balance sheet to over 70 per cent of GDP in coming months. Given the country’s ability to cope with its debt, nominal growth prospects in Japan remain anaemic with little improvement since the start of QE and the fiscal profile is expected to remain weak.

Is this fundamental reality reflected by the weightings in market-capitalisation benchmarks? No. Standard market-cap benchmarks allocate around 25 to 30 percent of a portfolio to Japan, a weighting which has almost tripled since the 1990s. Using a fundamental approach, such as our fundamental index which penalises over-leveraged countries, gives an allocation only around 3 per cent, which we believe, better reflects the Japanese government’s ability to repay, rather than its capacity to borrow.

The importance of fundamentals isn’t limited to the developed world. As we showed in a recent Fixed Income Perspective Piece “Return of Fundamental Differentiation, December 2014”, in emerging markets, fundamental risk is increasingly being priced by the markets. Chart 3 shows the performance of different emerging sovereign markets (local currency debt in USD terms) against the change in public debt witnessed over the 2013-14 period. Specifically, the group of countries which saw a reduction in public debt delivered an average return of -1.1 per cent over the period compared with -8.4 per cent for countries with rising debt burdens.

In conclusion, we think that rising debt burdens and QE-based monetary policy is pushing investors to take more risk. That makes it crucial for bond investors, who in reality are lending to a government or company, to assess the underlying value of a bond’s fundamentals.

Chart 3 Fundamental differentiation in EM debt markets

Performance of country bond index (local currency in USD terms) versus change in public debt

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Zum Vergrößern bitte auf den Chart klicken!

Salman Ahmed
Global strategist & Portfolio Manager
Lombard Odier Investment Managers 

Prof. Stephen Satchell, PhD
Fellow at Trinity College
University of Cambridge
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