At the core, like you, I am a long-term value investor, and like you, my portfolio strategy incorporates geographic diversification. As a result, when I’m attempting to find the best risk-adjusted returns, my analysis predominantly points towards investing in the advanced economies, such as the U.S., Europe, Japan, and Canada.
However, within some of these economies, the growing burden of sovereign debt and how that debt is managed is an area of increasing investment risk. Increasingly unsustainable public debt is a threat to favourable investing environments.
Investment Risk From Debt Challenges Value Investors Portfolio Strategies
Large and unsustainable public debt in the developed markets limits their governments’ fiscal policy options as increasing amounts of government revenue gets directed towards paying off debt.
If a government could choose between having high or low debt today, then all else equal they would (and should) choose the latter. After all, when debt is high governments have to impose unpleasant taxes to fund spending on debt-interest payments. These taxes are a drag on the economy.
Money directed towards debt does not get put to use in a way beneficial to the country’s long-term growth prospects. Case in point. I wouldn’t readily think of investing a single dollar in Greece. Would you?
As some food for thought below is a redrawn map of the globe. On the map, countries are not represented by how much geographical territory they have but scaled to a measure of their national debt. The larger the country appears the greater its debt burden.
Courtesy of: Visual Capitalist
Become a paid contributor to MyAssetClass.com by presenting your best and current experiences with value investing.
While investment strategies are personal, and this investor discussion forum doesn’t give investment or financial advice, there are some common tenets of value investing that can be better understood by structured and focused discussions with other like-minded investors.
Please join the discussion.