Global Debt Levels Raise Red Flags

Although debt levels are surging worldwide, we shouldn’t let this spoil the equity party, for now…

- Maarten Mittner

Champagne corks popped towards the end of 2019 as US equity markets notched up another sterling year, with the S&P 500 gaining 28%. The MSCI World Index ended the year 24% higher, with local investors also benefitting from the weaker rand. In contrast, the JSE All Share Index rose only 10% for the year.

The US Federal Reserve was seemingly vindicated with its stance to halt further interest rate cuts, supported by a strong US economy. Jobs data in the form of nonfarm payrolls surprised to the upside in November and, together with unemployment at a record 3.5%, reflected a vibrant US economy not in need of further upliftment through lower rates – as the Fed indicated earlier.

The surge in equity markets coincided with renewed merger and acquisition activity, reaching its highest level in two decades. But things look somewhat different this time. The high equity valuations provided the opportunity for companies to finance mergers with share issues, and not external bank debt. This is a much more prudent approach, which could mitigate any fallout in the event of a financial crisis or market pullback.

However, before popping more corks, it would be circumspect to be reminded of what Fed chair Jerome Powell said only a few months ago. Appearing somewhat perturbed, Powell noted that US debt was now growing faster than GDP, “which was clearly unsustainable”.