How to Invest in a High-Debt, Low Yield World

While the word “debt” often carries a negative connotation, “it is important to remember that debt can be used in different ways. In fact, all debt, similar to dietary fat, is not created equal.” This according to an article in last week Barron’s that outlines possible investment approaches in a highly-leveraged yet low-yield global market.

A healthy amount of debt creation is “necessary to support economic expansion, but too much can drag on growth and/or cause financial distress,” the article states. In developed markets, the long period of falling interest rates have made it “more sensible and less costly to incur debt.” In emerging markets, however, where financial systems are less mature, debt levels have been “growing too quickly” due to the ongoing search for yield.

The article offers the following considerations for investors:

  • Look for growth in a subdued growth world: Find companies that are “growing earnings faster than the market average, or that are fundamentally mispriced.”
  • Search for yield in flexible ways: For example, focus on companies with strong cash flow and room to growth their dividend payout ratios. The article also suggests considering alternatives such as real estate, preferred stock and private credit.
  • Take advantage of tax-efficient investment strategies: Since taxes may rise, investors should consult with a financial planner or advisor to accomplish this.
  • Maintain flexibility in asset allocation: Diversification across asset classes is important, as well as “unconstrained forms of investing not tied to a specific benchmark.”