The economy is doing great; the economy faces a tough year ahead; the economy is in trouble. All three of these positions are in circulation right now. Low and negative interest rates have brought up questions about the world’s future economic health; slow growth around the globe, especially in China and developed economies, has added emphasis to the question of economic dynamism in the months and years ahead. These kinds of pressures have prompted investors, to seek higher returns by adding riskier instruments to the portfolios of once conservative investors, including pension plans, sovereign wealth funds and family offices.
What happens when a weakening economy has to absorb the downsides from riskier investments? As Japanese investors know, the crux of the matter is debt, and the way debt is being packaged. Debt has elevated risks in the corporate world and the housing market, and risks from insurance costs due to climate-related damage add to the economy’s challenges. While the risky investments of the current environment are different from those that led to the Great Recession, the dynamic is similar, and some risky investments are turning bad.