JPMorgan breaks down why a record-setting debt surge will boost both stocks and bonds worldwide
- JPMorgan forecast that global debt will increase by $16 trillion this year, pushing combined public and private sector debt to a record $200 trillion.
- This could boost global equity and bond prices, according to a Friday note from strategists led by Nikolaos Panigirtzoglou.
- "Elevated cash holdings create a strong background support for non-cash assets such as bonds and equities," the strategists wrote. "We believe that most of this liquidity will eventually be deployed into equities as the need for precautionary savings subsides over time."
- Read more on Business Insider.
A surge in global debt to record levels will likely lead to loose monetary policy worldwide, boosting liquidity and supporting equity and bond prices, according to JPMorgan.
"Similar to the Lehman crisis, the virus crisis is causing a step increase in the amount of debt in the financial system," wrote strategists led by Nikolaous Panigirtzoglou in a Friday note. The firm forecasts that global debt will increase by $16 trillion this year, pushing public and private sector debt to a combined $200 trillion record.
The increase in global indebtedness would likely boost private-sector savings, which would "keep economic growth and inflation low and make it even more difficult for debt levels to decline vs. incomes in the future," said JPMorgan.
And, accomodative central bank policies and low interest rates are likely to continue "for a very long time" to make it possible to sustain higher debt levels. More credit and monetary stimulus imply a surge in liquidity, which would in turn "result in more asset reflation," according to the note.
"Elevated cash holdings create a strong background support for non-cash assets such as bonds and equities," the strategists wrote. "We believe that most of this liquidity will eventually be deployed into equities as the need for precautionary savings subsides over time."
In addition, JPMorgan noted that the jump in global liquidity following the coronavirus pandemic is happening faster than it did in 2008. The total money or liquidity creation could exceed $15 trillion globally by the middle of 2021, given that debt creation and quantitative easing will continue to be "stronger than normal" in the same timeframe, the strategists said.