Investors would be wise to pay attention to upcoming political events when deciding on asset allocations, participants at an investment symposium heard yesterday.
“One thing [U.S. president-elect Donald] Trump will do is supercharge our idea of fiscal stimulus,” Scott DiMaggio, director of global and Canada fixed income at Alliance Bernstein, told participants at an investment symposium the firm held in Toronto on Wednesday. “Next year, the political events are going to create a tremendous amount of buying opportunities for active managers.”
For example, Italy will hold a constitutional referendum in early December, while France’s presidential elections will take place next year. Those events will make the market susceptible to volatility, according to DiMaggio. And with that, there are bound to be dislocations as investors look to reduce risk in their portfolios, he notes.
“The buying opportunities will be in risk assets, particularly European corporate or company risk assets,” said DiMaggio. As well, he points to opportunities from assets that “carry some kind of credit risk, including emerging market debt or high-yield bonds.”
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When it comes to the economic outlook more generally, a key issue is “the debt trap” developed countries find themselves in, said DiMaggio. “We still have this lack of deleveraging out there . . . We still have sub-par growth across most of the world.”
Even China has joined the debt club by going on a “borrowing binge” over the past 10 years, said DiMaggio, who noted the country had a ratio of debt to gross domestic product of 249 per cent in 2015.
“The accumulation of unproductive debt had taken on a significance in the global economy. We did not predict that we would have trillions of dollars of quantitative easing [and] negative interest rates upon most of the developed world.”
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But while many countries have turned to low interest rates as a way to boost economic growth, DiMaggio suggested the notion that “low interest rates will help cure amount of debt out there has been a bit of a fallacy.”
Said DiMaggio: “Where there has been private sector debt reduction, that debt hasn’t really been extinguished. It’s just moved to the public sector.”
And despite the continuation of low interest rates, economic growth has been weak and many developed economies have remained in deflationary cycles, according to DiMaggio. “It leads to inflated asset prices . . . It takes away from savers . . . where we’re getting close to no return. It also keeps zombie companies going [and] unproductive capacity in the system. A company that couldn’t survive at five per cent interest rate might be able to pay their bill at two per cent interest rate.”
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