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
A lack of transparency and sound data remain huge challenges in many emerging markets. The panel discussed the link between governance principles, asset prices, trust in government and investment volatility and what investors can do about it.
What technological tools are investors using in a remote environment including more innovative ways to do due diligence? What behaviours and processes have changed because of COVID and lockdown?
Wei Xie explained the OPTrust focus on two subdomains of machine learning - reinforcement learning and uncertainty modelling - and how they can be used together.
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