How To Help Your Portfolio Age Gracefully, Even If Government Finances Don’t

Data out this week showed that global debt rose a staggering $8 trillion in the first three months of the year, taking the total above $300 trillion – roughly $45 trillion more than pre-pandemic levels. A big chunk of the rise was government borrowing – in other words, bonds – and experts are forecasting that the pace will pick up even more in the future, which could leave countries in a sticky situation. It’s still true that the amount of debt a country has isn’t as important as its ability to make good on what’s owed. But the problem is: things don’t look great from that standpoint either. See, populations are aging at a heady pace: the proportion of the population over 65 in Europe is expected to rise to 30% by 2050, from 20% now, and the numbers are similar in the US and elsewhere. That means higher costs for healthcare and pensions, and fewer workers to fund them – a recipe for unbalanced books if ever there was one. Add to that the effect of higher interest rates, which add to the cost of servicing those debts, and things start to look even worse.

Taken together, this tells you that governments’ credit ratings – which basically assess the ability of an entity to pay its debts – are at risk. In fact, ratings agency S&P is warning that if nothing changes, far fewer of the world’s biggest economies will have top-tier, AAA credit ratings (dark blue) by 2060, and as many as half will have “junk”, speculative-grade ratings (light pink).

That’s a big deal: these ratings determine both the ease and the cost of borrowing capital. And that makes sense: fewer people want to lend to someone who’s seen as a riskier bet, then those who will lend are going to want higher interest rates paid to them to compensate them for that risk. A rating downgrade, then, could mean cash-strapped governments face even higher costs to borrow, increasing their debt burdens while discouraging domestic investment and hitting growth – thereby creating a vicious cycle that’ll be hard to break.

What’s the opportunity here?

You could allocate a portion of your portfolio to sectors that are set to benefit from aging demographics – healthcare, for example, or leisure and entertainment (retirees have more free time, after all).

And, with governments potentially looking to shore up their finances as much as possible in the future, you might consider adjusting your portfolio to better position yourself in the event of future tax increases. That might mean making the most of tax-advantaged vehicles like the Roth IRA in the US and the ISA in the UK.

Finally, you might want to brace for a wave of (unpopular) rises in pension ages – as happened in France recently. It’s all the more reason to start building an investment pot as early as you can to keep your options open later on.