Fund managers Vanguard and AMP have warned investors that key advanced economies may face a potential fiscal crisis in the future due to unsustainable debt levels.
“I actually think the legacy of the [global financial crisis], ironically, is the potential down the line for a fiscal one,” Vanguard’s United States-based chief economist Joe Davis told advisers in Sydney yesterday.
“Now this notion of fiscal sustainability … was a big issue long before the crisis. But increasingly this will be a greater focus among investors.”
Debt levels for the United States, United Kingdom and eurozone countries have shot up after they collectively pledged trillions in stimulus packages and bank bailouts.
Gross debt to gross domestic product (GDP) for the United States and United Kingdom are forecast to soar past 100 per cent by 2020, from just under 100 per cent expected in 2011, according to International Monetary Fund data.
Japan’s gross debt to GDP is tipped to reach 250 per cent by 2020, from just under 200 per cent in 2007.
AMP Capital Investors head of investment strategy and chief economist Shane Oliver warned the potential for a fiscal crisis is the “most serious worry on the worry list right now”.
“A public debt crisis in key advanced countries is unlikely in the short term, but it is the risk worth keeping an eye on,” he said.
Despite concerns about high debt levels across the developed world, Davis said the long-term outlook for global stock and bond markets remained positive.
He said investors would be rewarded for adhering to investment principles including patience, diversification, controlling costs, strategic asset allocation, portfolio rebalancing and disregarding market noise.
“All in all, while the long-term market outlook is positive, there are some significant near-term risks including high debt levels and the fortunes of troubled sectors such as commercial real estate and smaller banks, to name a few,” he said.
“There are also sovereign debt issues in Europe and the question of how we are going to manage the scaling back of global fiscal stimulus.
“However, on the plus side, we are looking at strong performance in the global trade, manufacturing and technology sectors that are still at a favourable stage in the inventory cycle.”
