Obviously, different countries will use different mechanisms in their arsenal to deal with the debt burden resulting from Covid-19. But the general consensus is that developed countries will be able to tolerate a higher debt burden and remain on a sustainable debt path. Japan has been able to do that for decades despite having levels of debt to GDP ratio consistently above 150% since 2008 and at 200% since 2015.
But this means that interest rates across the developed world, already at historical lows, will remain low (lower than growth rate) for the foreseeable future. I believe we will also see a certain degree of higher inflation because there is obviously a limit to how much governments have control over interest rates and a question mark over whether they could resort to policies of financial repression to artificially lower bond yields. I do not believe that interest rates are about to shoot to double-digit levels seen in post war, yet I think that the world of sub-2% inflation is well behind us.
The key question for investors is whether, and how, to rebalance their portfolio for a post C- world of structurally higher inflation and protracted low interest rates. The answer to that question can be summarized in a simple observation: the traditional retirement portfolio of stocks and bonds is down by 20% for only the fourth time since WWII.
As a result, it comes as no surprise that family offices and HNWs with cash on hand have started to look into alternative investments and have begun to pile into private debt; they have few other places to put their cash. Government bonds yields are barely positive in the US, while they are negative in Japan and much of Europe. Effectively, investors are guaranteed to lose money by holding those bonds until maturity. If inflation rises, as many expect it to, the losses would be even larger.
Equity markets? Investors we speak to are nervous that these may see a correction following their recent rise. Between 19th February and 23rd March, the S&P 500 index lost a third of its value. With barely a pause, it has since rocketed, recovering more than half its loss. While the catalyst was news that the Federal Reserve would buy corporate bonds, helping firms finance their debt, investors are deeply worried that financial markets have become disconnected with the real economy and with the carnage taking place on the high street.
As a company that is backed by high-profile investors, we have witnessed a similar trend with an increased lending appetite from family office and HNW investors. Among others, Blend Network is backed by Cyrus Ardalan, former vice chairman of Barclays and current chairman at OakNorth Bank and Citigroup Global Markets, the Family Office of former Publicis Group CEO Maurice Levy, and Jean-Phillipe Blochet, co-founder of Brevan Howard, one of the world’s largest hedge funds which, at its peak, had $40bn in assets under management. I believe this brave new world of structurally higher inflation and protracted low interest rates demands investors to rebalance their portfolio and consider alternative investment products.
Roxana Mohammadian-Molina is Chief Strategy Officer and Board Member at Blend Network and sits on the Board of Women in Finance 2020. Blend Network is a London-based P2P property lending platform where investors can invest from £1,000 on property-secured loans. Returns on Blend Network are 8-12% p.a. and all loans are secured against property.
