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Global Debt Review

July 22, 2024
Paul Jackson
Paul Jackson
Global Head of Asset Allocation Research
Uncommon truths

Welcome to Uncommon Truths, Paul Jackson and Andras Vig’s regular in-depth look at the big topics impacting markets.

Getting away from elections, central banks, growth and inflation, we take our annual look at debt and debt service ratios.

The rapid decline in global debt to GDP ratios from the highs of 2020 came to a halt in 2023, with a slight rise in the BIS All-Country non-financial sector ratio to 232.6% (using PPP exchange rates). The chart shows those ratios for the 25 largest economies, with varied movements over the last year or so.

Private sector debt service ratios may be expected to rise as a result of the jump in interest rates and bond yields over recent years and there is now some evidence of that. However, there have also been some impressive offsetting reductions in corporate sector debt in some European countries.

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The optimal portfolios are theoretical and not real. We use optimisation processes to guide our allocations around “neutral” and within prescribed policy ranges based on our estimations of expected returns and using historical covariance information. This guides the allocation to global asset groups (equities, government bonds etc.), which is the most important level of decision. For Uncommon Truths, the optimal portfolios are constructed with a one-year horizon. 

We’ve chosen to include equities, bonds (government, corporate investment grade and corporate high-yield), real estate investment trusts (REITs, to represent real estate), commodities and cash, on a global level. We use cross-asset correlations to decide which decisions are the most important. 

Using a covariance matrix, based on monthly local currency total returns for the last five years, we run an optimisation process that maximises the Sharpe Ratio. Another version maximises Return subject to volatility not exceeding that of our Neutral Portfolio. The optimiser is based on the Markowitz model. 

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