Sovereign Debt and Asset Allocation
Some observations regarding these observation’s effect on asset allocation decisions are as follows:
1) Emerging-market economies have much less debt than their developed market counterparts, and much higher growth prospects.
2) Developed Europe is decelerating economically, and is mired in significant debt.
3) The U.S. dollar remains the world’s reserve currency. Although growth prospects domestically are about average compared to other nations, our level of wealth and the breadth of our economy will put us in the “winner” category.
4) As economies grapple with debt reduction, I expect the U.S. dollar to rise in value against other currencies.
5) Although there seems to be minimal political will to do so, debt reduction will have to be enacted by the developed world. I expect austerity programs will become in vogue and a will be a hallmark of responsible fiscal policy. Let’s hope it is accomplished through reductions in big government rather than by much higher taxes, although it will most likely include both of these strategies. At any rate, it will be those countries that can reduce their spending that will be able to keep on truckin’.
In closing, the above scenarios should create some a plethora of opportunities for savvy investors. We look forward to such interesting dynamics.