Even if only a few people are taking note of it at present, the debt problem should be attracting greater attention on investors’ radars. Looking back over the history of the financial markets, a simultaneous increase in debt levels and persistently high interest rates has often led to problems or even so-called “financial accidents” for companies or countries. The quarters ahead will likely show just how important it is to focus on quality in terms of a company’s income situation as well as with respect to its balance sheet, debt maturities and overall level of indebtedness. This applies to both equities and bonds.Interest rates for servicing debts have increased considerably for governments, companies and private individuals. The world has finally woken up from a dream-like phase in which cheap money was easily accessible between 2008 and 2022. What is less well known, however, is that global debt is at an all-time high. After more than a decade of unprecedently cheap financing, this should not come as a surprise to anyone. The total amount of money owed worldwide now stands at almost USD 315 trillion. To put it another way, according to the renowned “Institute of International Finance”, global debt has increased by in excess of 35% since 2013 alone.This increases the risks faced by the international financial system should economic developments change course, especially if there is a marked global economic slowdown. Should such a situation materialise, this would result in a significant deterioration in the ratio of debt to economic output or gross domestic product in many countries. This could relatively quickly give rise to discussions about how sustainable the debt levels of countries like Italy or certain emerging markets are and also lead to a widening of credit spreads, i.e. the additional yields, or rather risk premiums, that more indebted countries or companies have to pay. As is well known, these credit spreads have narrowed massively once more in recent months. Due to their lower credit quality, high-yield bonds may harbour a greater degree of default risk than their investment-grade counterparts. Many debts were taken on when interest rates were low. How problematic they now become will depend on when they fall due and how quickly they have to be refinanced at higher rates. This means that individual companies and countries will in future have to be scrutinised more closely than before. Selection is therefore the order of the day. When debt and debt interest find themselves at historically high levels, attention should be paid to quality.Gérard Piasko, Chief Investment Officer Financial history is full of examples of problems that have been triggered by interest rates that have remained relatively high. This is especially the case when debt levels have also spiked in a relatively short space of time. It may be some time ago now, but we should remember the collapse of the Nikkei in Japan at the beginning of the 1990s as well as past issues faced by emerging markets such as Mexico in 1994 and various Asian countries in 1997/1998. The financial crisis of 2008/2009 and the euro crisis of 2010/2011 were also triggered by an increase in debt that coincided with a sudden return to historically high interest rates.This time around, a number of debt-related problems appear to be on the horizon. From a renewed increase in volatility for indebted countries such as Italy to potential real estate corrections, for example in Australia, South Korea, northern European countries or, in some cases, the US. In the UK, payments made to service debt (and not just mortgages) now account for a large share of household income. In the Netherlands, Norway and Sweden, this figure already stands at between 10% and 15%. Flat and house owners in many countries, including in Asia, are bearing the brunt of the historically high interest rates. The same applies to so-called “zombie companies”, i.e. highly indebted companies with many employees together with declining profitability, which, according to analysts, at times now account for almost 20% of the firms listed on publicly traded stock exchanges.As the rating agency Moody’s reported, payment default rates in the high-yield segment, especially among companies with a lower credit rating, could soon rise considerably. In certain countries, there is also the threat of problems owing to the high proportion of debt denominated in US dollars. This is particularly true for real estate firms in emerging markets, where the issue of falling property values is compounded by a quite high level of greenback debt. However, there is also a so-called “leverage” issue in non-public markets. It is here that investments have been made with significant debt leverage, for example in the area of personal loans.Especially in a phase in which central banks are no longer supporting demand through bond purchases as they did previously, particular attention should therefore be given not only to the quality of companies, but also of countries. And this applies to both equities and bonds. Analysing each individual company becomes all the more important. Contact us now Market Comment June 2024 Gérard Piasko Gérard Piasko is Chief Investment Officer and head of the investment committee of private bank Maerki Baumann. Before he was for many years Chief Investment Officer of Julius Baer, Sal. Oppenheim and Deutsche Bank. Modular investments with Maerki Baumann The focus modules allow you to show the mentioned topics in your portfolio: Convince yourself of our modular investment concept, the individual selection of attractive investment solution modules and the transparent pricing model. Learn more Contact a client advisor for more information. Contact us Important legal information: This publication is intended for information and marketing purposes only, and is not geared to the conclusion of a contract. It only contains the market and investment commentaries of Maerki Baumann & Co. AG and an assessment of selected financial instruments. Consequently, this publication does not constitute investment advice or a specific individual investment recommendation, and is not an offer for the purchase or sale of investment instruments. The future performance of investments cannot be inferred from past price performance. In other words, the value of investments may increase but may also decrease, and the investor may be required to make additional payments for certain products. In certain circumstances, figures may refer to reporting periods of less than five years, which could reduce their validity. Predictions for the future are always non-binding assumptions. 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