Where are the gilets jaunes of the bond market?
As the various Central Banks peddle back on their quantitative tightening program the financing needs correspondingly grow. Buyers will need to be found at a point when competition for debt is rising. Global debt has climbed by $100 trillion since the financial crisis and sits around $240 trillion. China has been a big buyer of US Treasury bonds in the last two decades but as its economy slows and reorients from an export model towards one more focused on domestic consumption it will want to keep its savings at home and will have less surplus funds to invest abroad. Likewise the energy-producing Middle East has a demographic boom, and with oil prices lower and an expanding social welfare budget it is having to come to the capital markets for financing, becoming a competitor for funds rather than provider of them. Perhaps the greatest risk in debt markets lies in the corporate sector. US companies have been prolific issuers of new debt, much of it poor quality. The ‘investment grade’ market is far larger today than it was heading into the 2008 crisis. When a recession eventually arrives a lot of this debt will turn sour.
Investors face a problematic environment. Bonds are unattractive, and in some cases unsafe. This leaves equities as the best option, but the emphasis on careful stock picking has increased. Markets have had a strong quarter so a consolidation period should be expected. There is attractive value in a number of areas but this will require patience to unlock. With the US market richly priced the longer term opportunity should be in Emerging Markets, but this is unlikely to be realised until the US China trade dispute has a resolution.
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