Over the previous fifty years, the emerging and developed economies have witnessed what the World Bank refers to as “waves of debt accumulation”. The first occurred in the early ‘80s, following years of cheap borrowing costs, which allowed governments to expand their balance sheets. The subsequent rise in interest rates resulted in the Latin American debt crisis. Next came the Asian Financial Crisis (or Asian Contagion) in the late 1990s, once again resulting from a low interest rate environment which allowed global debt to amass once more, especially in rapidly growing economies in East Asia. Countries such as Thailand, Indonesia and South Korea witnessed a sharp downturn in growth and a sequence of currency devaluations, which lead to a global knock-on effect. The next crisis made it very clear that developed markets are not immune, when the Global Financial Crisis reverberated between 2007-2009 and the world witnessed the worst financial crisis since the Great Depression.
According to the World Bank, we are in the midst of the fourth wave, which began in 2010 and is expected to dwarf the last three waves; the report states: “making it the largest, broadest and fastest growing of the four. While debt financing can help meet urgent needs such as basic infrastructure, much of the current debt wave is taking riskier forms.” A World Bank group study states emerging and developed market debt hit a record USD55tn in 2018, “marking an eight-year surge that has been the largest, fastest, and most broad-based in nearly five decades.” Emerging market debt stands at a record 170% of GDP, an increase of just under 55% in just eight years. Once again, this debt accumulation has occurred in a low interest rate environment. However, the concern is that, unlike previous crises, debt is escalating in the midst of a low growth environment and is composed of more risky borrowing; fears are compounded by growing fiscal and current account deficits globally.
With the coronavirus uncertainty overshadowing any green shoot indications, we do not see interest rate hikes gaining in the short term. However, when they do, the world may face its most severe crisis. Interestingly, the recent Wuflu induced flight to safe assets has seen the pool of negative-yielding bonds reach close to USD 14tn. We therefore remain comfortable with our single A positioning at the longer-end of the curve and weighted average credit notch cushion above 3 notches across our three strategies.