When investors talk of long-term trends, they are often referring to the next three to five years. Few envisage horizons past the ten year mark. Yet super long-term trends do exist and are slowly but definitively changing the world socially, economically and politically. In our minds, some of the largest of these are demographics, debt, the technology of energy provision and gene based medical discoveries. We address the first two, which represent more of a threat than opportunity, in a chart book.
The world is getting older. This is a topic that has been acknowledged and fretted over by academics, economists and governments, whilst relatively little can be done on a supra-state basis. In the recent past, people worried about world population exploding to unmanageable levels, which at the time seemed realistic. They noted that the world’s population doubled twice in the 20th century. However, future demographic shifts in many countries from today will be driven by longevity and low fertility rates. This will lead to a sharp fall in working population relative to retirees and eventually lead to a decline in overall numbers as the fertility rate is on trend to fall below the replacement rate (2.1 children per woman).
In many developed nations, economists are forecasting working population declines of more than 10%, true for most of Europe, and is even more stark for Japan at 20%. The emerging nations have a younger population in general, but they are also growing old at a rapid pace. Citing the Geneva Association: ‘By 2040, Brazil and Mexico will be nearly as old as the US. China will be older. Meanwhile, South Korea will be vying with Germany, Italy and Japan for the country with the oldest demographic profile’. The only exception is Africa, a populous continent with a much higher fertility rate.
The consequence of an aging world is grim. A substantial increase in the ratio of retirees to the working population will be a blow on labour productivity and place strains on government fiscal costs as a result of increases in social spending, including public pension and health insurance programs. Only the countries with a more open immigration policy will fare relatively better (e.g. US and UK). The worry for emerging nations, on the other hand, is that many are getting old before they are getting rich, with no time to put in place full social protections of a modern welfare state.
Ageing will also impact financial assets as people’s behaviour changes to become more risk-averse. Demand for low risk products that facilitate wealth preservation, rather than asset accumulation, will increase. The conjecture is that as the retirees draw-down their investments to fund their spending, it will also have an adverse effect on asset prices, in particular on equities. With pressure on central banks to maintain low inflation and low interest rates, policy orientation will continue to punish and savers and pension providers (with high bond allocation offering little return).
The trends in demographics are related to those in debt: worsening debt levels drives up government expenditure and drives down income. Perhaps one of the biggest challenges for policymakers is to determine how to deleverage under an unfavourable demographic scenario plagued with persistent low inflation and low growth.
The amount of debt currently existing in the world is colossal, a level not seen since WW2. Global debt has risen by US$57 trillion post-2008 to almost US$200 trillion, now representing 286% of world GDP. Emerging market corporates went on a borrowing binge during the QE phase, encouraged by low interest rates and ample liquidity, while the developed market countries struggled to deleverage. China is one of the biggest offenders in this arena, where its corporate bond sector (ex. financials) ballooned to 125% of GDP from 72% in 2007.
Empirical studies by academics often claim that high debt-levels may be damaging to economic growth. We have already observed that growth is slowing across the globe. To imply a causal relationship of one to the other remains very much the minority view. High debt levels do, however, have implications on long-term interest rates as it calls into question a governments’ fiscal sustainability, which will create an array of problems for interest-rate sensitive segments of the economy. For emerging countries, who have issued large amounts of external debt, it makes them more vulnerable to currency movements and capital outflows, should sentiment experience a reversal.