This session examined the growing debt burden, borrowing from the future, and the impact on markets, the economy and asset class returns.[vc_quotes layout=”accordion” quotes=”%5B%7B%22name%22%3A%22Rich%20Randall%22%2C%22job_role%22%3A%22Global%20head%20of%20debt%2C%20IFM%20Investors%20(United%20States)%22%2C%22content%22%3A%22Rich%20Randall%20is%20responsible%20for%20the%20creation%20and%20management%20of%20IFM%20Investors%E2%80%99%20debt%20investments%20strategies%20and%20portfolios%2C%20and%20for%20the%20debt%20investments%20team%20globally.%20He%20also%20heads%20IFM%20Investors%E2%80%99%20North%20American%20debt%20investment%20business.%20Based%20in%20New%20York%2C%20he%20has%20more%20than%2020%20years%20of%20experience%20in%20originating%2C%20analysing%2C%20structuring%20and%20arranging%20debt%20facilities%20for%20large%20infrastructure%20projects.%20His%20experience%20includes%20fixed%20and%20floating%20rate%20debt%20instruments%20across%20a%20broad%20credit%20and%20industry%20spectrum%2C%20and%20he%20has%20a%20specialty%20in%20the%20US%20energy%20sector%2C%20which%20is%20the%20primary%20source%20of%20infrastructure%20debt%20issuance%20in%20North%20America.%20Randall%20joined%20IFM%20Investors%20after%2010%20years%20with%20RBS%2C%20where%20he%20was%20head%20of%20project%20finance%20in%20North%20America.%20He%20also%20managed%20and%20was%20responsible%20for%20the%20bank%E2%80%99s%20%243%20billion%20portfolio%20of%20infrastructure%20investments.%20Prior%20to%20RBS%2C%20he%20spent%20nine%20years%20with%20Credit%20Agricole%20(Credit%20Lyonnais)%20as%20a%20senior%20banker%20structuring%2C%20analysing%20and%20underwriting%20project%20finance%20debt.%22%2C%22image%22%3A%2244345%22%2C%22linkedin%22%3A%22https%3A%2F%2Fwww.linkedin.com%2Fin%2Frichard-randall-73576150%2F%22%7D%5D” title=”Speakers” el_class=””][vc_quotes layout=”accordion” quotes=”%5B%7B%22name%22%3A%22Colin%20Tate%20%22%2C%22job_role%22%3A%22Chief%20executive%2C%20Conexus%20Financial%20(Australia)%22%2C%22content%22%3A%22Tate%20has%20been%20an%20investment%20industry%20media%20publisher%20and%20conference%20producer%20since%201996.%20In%20his%20media%20career%2C%20Tate%20has%20launched%20and%20overseen%20dozens%20of%20print%20and%20electronic%20publications.%20He%20is%20the%20chief%20executive%20and%20major%20shareholder%20of%20Conexus%20Financial%2C%20which%20was%20formed%20in%202005%2C%20and%20is%20headquartered%20in%20Sydney%2C%20Australia.%20The%20company%20stages%20more%20than%2020%20conferences%20and%20events%20each%20year%20%E2%80%93%20in%20London%2C%20New%20York%2C%20San%20Francisco%2C%20Los%20Angeles%2C%20Amsterdam%2C%20Beijing%2C%20Sydney%20and%20Melbourne%20%E2%80%93%20and%20publishes%20five%20media%20brands%2C%20including%20the%20global%20website%20and%20strategy%20newsletter%20for%20global%20institutional%20investors%20conexust1f.flywheelstaging.com.%20One%20of%20the%20company%E2%80%99s%20signature%20events%20is%20the%20bi-annual%20Fiduciary%20Investors%20Symposium.%20Conexus%20Financial%E2%80%99s%20events%20aim%20to%20place%20the%20responsibilities%20of%20investors%20in%20wider%20societal%2C%20and%20political%20contexts%2C%20as%20well%20as%20promote%20the%20long-term%20stability%20of%20markets%20and%20sustainable%20retirement%20incomes.%20Tate%20served%20for%20seven%20years%20on%20the%20board%20of%20Australia%E2%80%99s%20most%20high%20profile%20homeless%20charity%2C%20The%20Wayside%20Chapel%3B%20and%20he%20has%20underwritten%20the%20welfare%20of%2060%2C000%20people%20in%2028%20villages%20throughout%20Uganda%20via%20The%20Hunger%20Project.%22%2C%22image%22%3A%2244341%22%2C%22linkedin%22%3A%22https%3A%2F%2Fwww.linkedin.com%2Fin%2Fcolin-tate-839a5a181%2F%3ForiginalSubdomain%3Dau%22%7D%5D” title=”Moderator” el_class=””][vc_empty_space height=”10px”]
Key takeaways
The unprecedented level of government debt signals sub-par economic growth ahead.
Debt involves borrowing from the future, and all studies show that countries that have high levels of debt have lower rates of GDP growth.
Government bonds are no longer a defensive asset: the downside risk of holding government bonds has increased and the negative correlation with equity reversed.
Investors have found opportunities in corporate debt in the wake of bank disintermediation since the GFC. Banks have ceded much of their lending in developed markets to the capital markets. However, private assets hold illiquidity risk as opposed to tradeable government bonds.
Companies that were hanging on before the pandemic and that got rescued will now face a reckoning. Service-type companies are over-leveraged, and airlines are also highly leveraged. Fallen angel opportunities exist as investment grade companies fall into the sub-investment grade market.
Debt capital provided by non-banks in US and Europe is developed, but in Asia only around 10 per cent of debt capital is provided by non-bank institutions.
Private corporate debt opportunities in emerging markets are limited because of the accompanying volatility. There is also a supply and demand imbalance given banks’ role in providing capital.
The big difference between the vaccine rollouts and the scale of the stimulus measures across the world could result in a K-shaped global economic recovery, with much of the developed world booming but poorer countries continuing to struggle. However the
Investors discuss how technological change and the new green economy is re-pricing assets in infrastructure, as well as the trend to substitute fixed income with infrastructure debt. But investors should not to lose sight of traditional infrastructure characteristics in their quest to tap new trends. Predictable cashflows and downside protection remain central.
Research that looks at the relationship between economic transparency and defining investment qualities such as yield spreads, credit ratings and stock price volatility shows sovereign transparency helps improve the value of assets, enables countries to lower their borrowing costs and achieve a better credit rating.
Inflation holds investor opportunities as well as perils. Emerging markets, commodities and linkers do well in a climate of rising prices while central banks are likely to act quickly and aggressively in response rather than early or gradually.
The unprecedented level of government debt signals sub-par economic growth ahead, warned Farouki Majeed, chief investment officer, Ohio School Employees Retirement System speaking at FIS Digital alongside Rich Randall, head of global debt at IFM Investors.
Inflation is the number one investor concern and whether it is here to stay was the subject of much debate at the Fiduciary Investors Symposium. While its longevity is contested it was agreed that its presence has important implications for the correlation between bonds and equities which creates problems for portfolio design. Investors at PGIM, QMAW, CPP Investments and NEST discuss.
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