Record levels of corporate and household debt, combined with the prospect of rising interest rates, are putting the Australian and world economies on a knife’s edge.
That’s the view of Jamieson Coote Bonds director of investment, research and strategy Paul Chin, who is also concerned about the prospect of ‘contagion’ from the collapse of the Turkish lira last week.
“Our concern with markets right now is that investors are not compensated well enough for the risks that they're taking. That’s evident in so many different ways,” Mr Chin said.
While he is not predicting the current crisis in Turkey will create a broader financial crisis along the lines of the 1998 Asian meltdown, Mr Chin said it is a sign of the dangers of autocratic leadership.
Turkish president Recep Tayyip Erdogan, who effectively controls monetary policy in the country, refuses to raise interest rates because he believes doing so would lead to inflation (an opinion that is at odds with almost every economist in the world).
The consensus among economists is that Turkey needs to raise official interest rates by about 1,000 basis points (10 per cent) in order to arrest the decline of the lira, which fell 40 per cent against the US dollar last week following the imposition of US trade sanctions.
Mr Chin said he had similar concerns about the autocratic manner in which US president Donald Trump has ignited a trade war with China.
“It’s a major risk and it really does derail world growth. It could precipitate the next crisis inadvertently as well,” Mr Chin said.
Trade wars, by definition, can only be win/lose or lose/lose, he said. In the latter scenario, he said, “everyone goes protectionist and isolationist”.
“It’s just tinder dry in terms of how late cycle we are. We have high debt levels and one little thing can push everything over the edge,” he said.
Jamieson Coote Bonds (JCB) is a ‘pure-play’ defensive fixed income manager that invests in high-grade Australian bonds as well as the sovereign debt of G7 countries.
Mr Chin says many of the financial advisers he talks to are “pulling their hair out” looking for growth options in their portfolio.
But if JCB is right, they might be looking for the wrong thing at the wrong time.
“Advisers are thinking to themselves: ‘Things are pretty richly valued right now. I’m concerned about the trade war, I’ve read stuff about Turkey. I’d better start reading about defensives,’” Mr Chin said.