| | “First you worry about fighting the war, then you figure out how to pay for it”
Debt is at the top of the agenda, with governments and companies seeking ways to hold out as the economic impact of coronavirus continues to put severe pressure on sovereign and corporate finances.
UK government borrowing has passed an all-time-high of GBP2 trillion, while the IMF says that public debt globally is almost at 100 per cent of output this year.
As Carmen Reinhart, chief economist at the World Bank, puts it: “First you worry about fighting the war, then you figure out how to pay for it.”
Already-indebted businesses need further access to capital perhaps even more than they did during the aftermath of the 2008 financial crisis, according to the world’s largest asset manager, BlackRock.
With the pile of sub-investment grade debt more than doubling to USD5.3 trillion since 2007, BlackRock is recommending a rise in allocations toward private credit.
In the UK, Chancellor Rishi Sunak is attempting to prop up struggling businesses by extending support measures for businesses that cannot afford to keep staff employed full-time during the pandemic.
However, this hasn’t stopped investors punishing UK equity funds with heavy outflows as post-Brexit trade negotiations wear on without a deal in sight, and as dividends halve in three months. Deal or no deal, value investors say this is not a time to lose faith, as UK stocks now trade at a significant discount to US and Europe.
On the other side of the globe, Japanese equity funds have started to look appealing, as the balance sheets of Japanese companies are cash-rich and have become a source of strength during the pandemic. Investor sentiment may still be held back by Japan's central bank’s rate review next week, in which it is expected to cut its growth and price forecasts for the current fiscal year.
Meanwhile, the world’s largest asset managers have added 15 per cent more assets to their books in the past year, sending overall AuM to a record USD104.4 trillion.
Madeleine Taylor
Editor, Institutional Asset Manager
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