The World Bank warns that the current wave of borrowing is the greatest since the 1970s. And, it brings with it the possibility of a financial meltdown and that risk is only partially mitigated by persistently low interest rates. As always, our concern is with the individual investor. How will a global debt crisis affect your investing?
Will There Be a Debt Crisis?
CNBC reports on the warnings of the World Bank of a global debt crisis.
The World Bank has warned of the risk of a fresh global debt crisis, urging governments and central banks to recognize that historically low interest rates may not be enough to offset another widespread financial meltdown.
In its biannual Global Economic Prospects (GEP) report, published late Wednesday, the Washington D.C.-based group said there have been four waves of debt accumulation over the last 50 years.
The current wave – which started in 2010 – is thought to be “the largest, fastest and most broad-based increase” in global borrowing since the 1970s.
Global debt stands at 230% of the sum of all gross national products. China, specially, has been adding to this picture as its managed economy tries to cope with a slowdown. The three waves of debt growth that they refer to in their study all ended with a financial slowdown. The Financial Crisis of 2008 to 2009 was the worst.
Evaluating Investment Risk
Investment always carries a risk, even when you try to invest without losing any money. As noted by Investopedia, risk management is the process of identifying and analyzing risk. That risk can be accepted or the investor can take steps to mitigate the risk. On an individual basis, an investor cannot change how much debt China, Japan, or Germany take on. But, they can modify their investment portfolios to avoid areas of high risk and put more money where it might be safer.
In our article about the best investments for the next decade, we noted that South Asia and particularly India, Vietnam, and Indonesia are attracting foreign direct investment capital at a time when investments are falling off elsewhere. Although these economies make money from exports, their growth opportunities are bases on the growth of their middle class and the expectation of strong consumer spending. If the combination of the permanent trade war, trouble with Iran, and high debt hurt the global economy, these countries will remain as attractive investment opportunities.
How Will a Global Debt Crisis Affect Your Investing?
The last debt and financial crisis was devastating for the majority of investors. But, those who had portfolios characterized by high intrinsic stock value and who stayed the course have done exceptionally well in the decade since. Those who had been staying in the market in search of one more surge of profit tended to bail out as the market fell and many have never returned to the stock market.
Well-chosen stocks in companies that will keep making money even during a financial downturn will be good choices. And, companies with low debt burdens will also do well as they will not be caught in a bind when credit tightens!