The chart below shows the ratio of private debt to GDP in the U.S., U.K. and Australia:
Click to enlarge:
Source: The Absolute Return Letter February 2012, The Unlikely Bull Market, Absolute Return Partners, LLP
British households are more leveraged than households in the U.S. Private debt peaked at over 450% of GDP in 2008 in U.K. compared to over 300% and 150% in the U.S. and Australia respectively. While households have started the deleveraging process after the credit crisis, they still have a long way to go before reaching manageable debt levels. As consumers reduce debt, consumption of goods and services is bound to suffer. Hence any recovery in the consumer-driven economies of the U.S. and the U.K. will be modest. Accordingly investors may want to be cautious of the recent rally in global equity markets.
iShares MSCI Australia Index (NYSEARCA:EWA)
SPDR S&P 500 ETF (NYSEARCA:SPY)
iShares MSCI United Kingdom Index (NYSEARCA:EWU)
Disclosure: No positions