Since at least the 1990s, analysts of emerging markets (EM) have not only eyed market risk through the lens of those nation-states’ economic positions. They also have weighed those countries’ governmental fiscal accountability, social stability and popular acceptance of state policies, and the acumen and independence of their central banks. On occasion, market analysts have applied this second set of risks to developed markets (DM), the European sovereign debt crisis of 2011 being one example. However, to a large extent, DM issuers of sovereign debt securities have enjoyed the luxury of an investor base focused on economic factors to the exclusion of these other considerations. But that is ceasing to be the case. Market participants are coming to the realization that the time has come to hold the so-called developed markets to the same standards. DM countries, including some of those representing the Group of Seven economies, no longer can claim to be the adults in the global fiscal-monetary room. The tension, if not a brewing collision, between managing a country’s fiscal position and social demand is here for us to see in the forms of political agitation and rudderless budgets. Markets are starting to reflect these realities via steeper yield curves, high long-end interest rates and currency volatility.
What follows is not a doomsday forecast but a call for active allocation among sovereign risks to DM countries’ monetary promises. I will lay out the developed sovereign borrowers whose fiscal-political positions appear to be at greatest risk: France, the United Kingdom and Japan. I also will review similar market warning signs for the United States.1 Then I will share an allocation strategy for navigating these emerging risks in the developed world.
To view DM Safe Haven No Longer to Be Taken for Granted in its entirety, please visit: https://doubleline.com/markets-insights/winds-of-change-dm-safe-haven-no-longer-to-be-taken-for-granted/
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