By Neil Dwane
Many scholarly research reports, amongst them those from the US Federal Reserve, demonstrate that the baby-boomers have not only controlled the growth in asset classes, especially through housing and equity markets, but are now also starting to retire.
Over the next 20 years, this should lead to the rational realisation of their assets not only towards more income producing assets but also to capital protection rather than to further appreciation. This handover of course suggests that ideally they would ‘sell these long duration assets’ to the next generation, the millennials.
However, due to the size and success of the baby-boomers and improvements in healthcare, the millennials are simply not financially capable of servicing the country’s extreme sovereign debt position, paying as they go into the tax and healthcare systems and buying up all the assets on sale. This is exacerbated in the US, and increasingly in the UK, by recent policy decisions which are encouraging the youth to take up student debt in order to complete their university education, so that they enter the real world with already high levels of debt; indeed, in the US, student debts now exceed US$1trn.
Additionally, history shows that home and family formation typically happens between the ages of 25 and 30 and this has allowed the generational handover to pass successfully. Statistics now show that millennials are living differently and it is not just Facebook but also a lack of enthusiasm for owning a car which suggests that this transition may be more protracted than previously. It is also now being exacerbated by the extreme generational unemployment, most notable in the European Union (EU), where between 30-60% of under 25-year-olds are unemployed. Needless to say, if not soon rectified, this situation will have dramatic and long-lasting negative consequences for the economies concerned as the millennials cannot pick up and take the slack caused by the retiring baby-boomers, let alone take the economy forward. So where will the buyers of these assets come from if this handover is to proceed smoothly?
Also at work currently is evidence that old and ageing populations prefer low inflation while younger populations prefer a higher level of inflation. Consequently, with most of the Organisation for Economic Co-operation and Development (OECD) ageing over the next 20 years, the world of financial repression may last even longer than we have so far surmised as it will be swimming against this dis-inflationary tide.
Perversely, this may lead to the conclusion that quantitative easing (QE) policies are here to stay for the next 20-30 years, not just the next five years, in our view. The world’s population (ex-Africa) will peak and top out in the next 10-20 years. We should, therefore, expect to see marked shifts in spending patterns as consumption, both conspicuous and resource- orientated, should be driven more and more by the emerging economies and the US – if they can increase consumption any more as a percentage of gross domestic product (GDP) from 72% currently – while the OECD should rebalance more towards healthcare and ageing related expenditures, as we are already witnessing in Japan. Rising living standards and ageing may thus benefit pharmaceuticals and health-related industries uniquely while many other sectors are both winners and losers around the global economy.
Demographics and their long-term, gradual yet almost inescapable consequences must influence and shape our thinking of the prospects for our economies and corporate profits prognosis as they unfold. They also allow us to contextualise the policy implications for governments and policy makers as they wrestle to emerge from the ‘last war’, fighting a global debt crisis, excessive consumer and sovereign debt and a paucity of productivity and innovation to fuel the next leg of growth. Quantitative easing and its financially repressive friends seem to have forced more risk taking but, perhaps, demographics will militate lower returns regardless.
Neil Dwane is CIO equity Europe at Allianz Global Investors
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