Global public and private sector deleveraging is likely to occur over several years, with some evidence of re-leveraging as companies look to take advantage of low financing costs, according to a Fidelity Worldwide Investment survey.
The cycle could have significant implications for investors, the survey of more than 100 of Fidelity's equity and fixed income investment team members found.
"From an equity perspective, the current environment greatly adds to the appeal of reliable companies with robust balance sheets (without much debt) and good cash flows that can support healthy and, ideally, growing dividend payments," the report said.
Companies in that group tend to be well-established, high quality large caps with broad multi-national footprints.
Portfolios of this type of stocks tend to provide good long-term returns with acceptable levels of volatility, with dividends a major part of their total returns.
Deleveraging is occurring globally, but many emerging market companies have avoided the kind of debt accumulation that has become so problematic elsewhere. Fidelity analysts believe the absence of deleveraging constraints plus other supportive developments (such as rising incomes and growing middle classes) combine to make emerging markets an attractive long-term investment proposition.
"From a fixed income perspective, our analysts believe that the current environment of low inflation and low interest rates calls for a fundamental re-evaluation of the 'risk-free' concept, with the idea of the 'lowest rate of risk' perhaps making a better alternative," the report stated.
"With the yield on safe-haven assts such as treasuries and bonds, having moved down to historically very low levels, their upside potential now looks more limited while downside risk is heightened."
Fidelity fixed income analysts said that as a result, the current environment called for more strategic, diversified forms of market exposure and greater consideration of higher yielding investments in the investment grade, high yield and emerging market sovereign debt market spaces.
