The U.S. national debt is a growing concern of pension systems, endowments, and other institutional investors in North America.
A new market regime began two years ago, as inflation took off and central banks raised their target interest rates. More recently, inflation has slowed and the Federal Reserve began what is expected to be a series of rate cuts. But institutional investors aren’t treating this phase like one that has come and gone. Even as interest rates are lowered, investors believe they will remain relatively high for the foreseeable future and that, coupled with violent conflicts and more, is changing how they invest.
“There’s definitely a rising concern about geopolitics, about changing monetary policy, and the consequences for that on portfolios,” Adam Farstrup, head of multi-asset, Americas at Schroders, told Institutional Investor.
Schroders, the London-based firm with $978.1 billion in assets under management, surveyed investors this summer from 216 North American institutions about macroeconomic issues. When asked what influence various things would have on their portfolio’s performance in the coming 12 months, central bank policy was the most common concern among investors (75 percent), followed by high interest rates (71 percent), an economic downturn (62 percent), and geopolitics (61 percent).
But the response to those worries is mixed. Some clients are reducing their risk and others are selectively increasing it, Farstrup said.
Additionally, Farstrup said that institutional investors are increasingly concerned about the U.S. national debt, which is on track to top $1.9 trillion, or more than 6 percent of economic output. That’s a threshold reached only around World War II, the 2008 financial crisis, and the pandemic. Publicly-held federal debt recently passed $28 trillion or almost 100 percent of GDP. “It is at a level that is unusual during peacetime and when we’re not in a recession. That has made the concerns even more acute. There was a recognition, if we think about 2021 and 2022, of the need to protect the economy in the wake of the extraordinary disruption of the pandemic, but what’s the plan from here?” Farstrup said.
Neither Kamala Harris or Donald Trump have talked much about the national debt and markets are unconvinced that a plan will suddenly materialize after the November election.
“This is something that’s been talked a lot about on Wall Street for the last 12 months or so. Now, I think it’s certainly reaching a crescendo as we head into the election, and I think that’s going to be something we see a lot of focus on regardless of who wins the presidency,” Farstrup said.
Institutions are most worried about their fixed income portfolios. When asked about the biggest threats to those allocations, central bank policies (67 percent) and macroeconomic risks, such as higher than expected inflation or a slowdown in growth (64 percent) were the top ones. But close behind were growing concerns over total debt issuance (60 percent), according to Schroders’ survey. Farstrup was also quick to stress that increasing national debt is also a global phenomenon.
“What we saw is an increase in government fiscal spending around the world in the wake of the pandemic. And so in economies in Europe — and we’re certainly seeing a lot of attention on what China is going to do with its fiscal policy right now — where does that sit relative to growth ambitions? You’re seeing these rising levels of debt around the world,” Farstrup said.
