Investor Recommendations Quarter 4 2011
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Demographics and Equity Markets - What does the Future Hold?
Many of us who have reviewed the equity performance of our
pension investments and investment funds of the past 10 years have
understandably become disillusioned with the returns such high risk
assets have provided. The global climate of uncertainty has
encouraged investors to review their exposure to equities once
more.
A new study by McKinsey Global Institute predicts several
unstoppable global trends that will conspire to keep down demand
for equities, whatever the fate of the world's economy or its
financial system. In summary the McKinsey report links the aging
population of Europe and the USA with projected future decline in
demand for equities. They argue that as people get older and move
into retirement years, they tend to move their pension and other
assets away from equities and other such accumulating assets
towards income producing investments such as bonds and even bank
deposits.
As the enormous baby boom generation in the United States and
Europe enters retirement (the oldest members of this cohort reached
65 in 2011) many predict that there will be a large scale global
equity sell-off. McKinsey argue that although the Emerging Market
countries of India, Brazil and China etc. may provide the ability
to take up some of the slack caused by the reducing demand of
equities of retirees in the 'developed world', the population of
these 'emerging countries' tend to hold lower amounts of the their
wealth in equities when compared with 'developed world'
populations, and the shortfall will not be met.
Should McKinsey's report be prescient, the future for asset
allocation in typical investment portfolios, in particular longer
term pension portfolios, should be reviewed. A shift away from
equity in the global financial system is an important trend. Equity
markets have enabled growth by efficiently channelling money to the
best-performing companies. Without sufficient demand in equity
markets, companies will be forced on greater use of debt which, at
a time when the global economy is struggling to recover from the
collapse of the credit bubble, is an unwelcome development.
Whilst I believe that the McKinsey study does not adequately
reflect the fact that the world is a far more globalised place than
ever before, and that increased globalisation results in attitudes
and behaviours changing far more rapidly than previously, I do
still find that the study raises some interesting concerns in
relation to equity investing.
I reiterate my advice in relation to investment strategy -
diversify your portfolio across differing asset classes,
geographical regions and currencies. Look to include some
'Alternative Asset classes' such as exposure to agriculture,
emerging markets, and commodities, and finally remember that I am
here to help you construct a portfolio which suits your investment
parameters. As usual I have selected my 'Best Picks' for
investments in each category depending on your Risk / Return
profile. I would be delighted to discuss these opportunities with
you, whether you wish to invest via a pension plan or investment
bond or regular savings plan. I hope you find this report
informative and if you have any queries please do not hesitate to
contact me.
