Demography is Destiny, How Demographic Trends will Depress Portfolio Returns

[Ed_The_Gypsy]

Ooo! Ooo!

1. Living in cold, dark holes in the ground thanks to global cooling.
2. Hoarding food since the cooling mentioned above has caused a huge decrease in food production.
3. Be well armed in order to defend our hole in the ground house from the rampaging, lawless hoards that roam our cities.
4. Oh, the DOW has reached 25,000!!

1. Global warming will open up much of Canada to farming when it was not possible before. Do you have any idea how big Canada is?
2. See 1. Spam is OK, actually.
3. How is this different from today? If it comes to this, we are all toast anyway.

 

[Gone4Good]

A more global look by McKinsey highlights a fact I had not considered: very little of the growing wealth of developing countries is invested in equities. They forecast that the global equity allocation will fall to 22% of all financial assets from 28% by 2020. As the developing world becomes richer, they'll likely increase their equity allocations but the timing is uncertain.

So might we have a generational shift out of equities as global wealth migrates from high equity owning countries to low ones? Will that be followed by a huge global surge back in to equities as new foreign wealth is eventually diversified away from bank deposits?

My predictions: volatility.

 

[SpencerM]

Texas, please do not confuse us with logic!!! It is far better to fear the future and preach distaster, at least it is more profitable.

Based upon predictions heard in my past we should now all be:

1. Living in cold, dark holes in the ground thanks to global cooling.
2. Hoarding food since the cooling mentioned above has caused a huge decrease in food production.
3. Be well armed in order to defend our hole in the ground house from the rampaging, lawless hoards that roam our cities.
4. Oh, the DOW has reached 25,000!!

Anybody still interested in making that time machine

Don't forget:

5. All be burning up due to global warming
6. All be standing in a line to buy a Volt.

 

[Texas Proud]

A more global look by McKinsey highlights a fact I had not considered: very little of the growing wealth of developing countries is invested in equities. They forecast that the global equity allocation will fall to 22% of all financial assets from 28% by 2020. As the developing world becomes richer, they'll likely increase their equity allocations but the timing is uncertain.

So might we have a generational shift out of equities as global wealth migrates from high equity owning countries to low ones? Will that be followed by a huge global surge back in to equities as new foreign wealth is eventually diversified away from bank deposits?

My predictions: volatility.

From the article:

"Based on these trends, we project the share of global financial assets in
publicly traded equities could fall from 28 percent today to 22 percent by
2020. That will create a growing “equity gap” over the next decade between the amount of equities that investors will desire and what companies will need to fund growth. This gap will amount to approximately $12.3 trillion in the 18 countries we model, and will appear almost entirely in emerging markets, although Europe will also face a gap."​

Again, let me go with my logic... ​

In the article they say that the emerging markets will be putting their wealth in bank deposits and CDs... but what are the banks going to do with that money Sit on it? Not likely... Lend it to companies that need money to invest? Likely... ​

So, even if there is an equity gap of $12.3 trillion, it does not mean there is an investment gap of $12.3 trillion...​

Now, what happens when there is more demand than supply The price goes up... so from what this article is saying the cost of equity should go up... or another way to say it is that the return on equity will go up.... This seems to be the exact opposite of the OPs article...​

Note: I do not plan to read all the 108 pages to see if they addressed this... anybody willing to do it


Edit to add:
Never mind... the next section says that the cost of equity will be going up...​

 

[RetireBy90]

Again, let me go with my logic... ​

In the article they say that the emerging markets will be putting their wealth in bank deposits and CDs... but what are the banks going to do with that money Sit on it? Not likely... Lend it to companies that need money to invest? Likely... ​

So, even if there is an equity gap of $12.3 trillion, it does not mean there is an investment gap of $12.3 trillion...​

Now, what happens when there is more demand than supply The price goes up... so from what this article is saying the cost of equity should go up... or another way to say it is that the return on equity will go up.... This seems to be the exact opposite of the OPs article...​

Note: I do not plan to read all the 108 pages to see if they addressed this... anybody willing to do it​

Edit to add:
Never mind... the next section says that the cost of equity will be going up...​

so if I understand, less demand for equities means lower prices. More demand for other asset classes perhaps. How many articles have you read about new asian middle class buying realestate? How about Indians that purchase gold? Course if there is all that $$ in savings and CDs then wouldn't that mean it will be cheap to borrow? Banks gotta do something like you say. So RE, Gold go up, bond returns sux, equities - I'd still bet that your going to get something if business sells more and makes more $$. Perhaps more dividends?

 

[Texas Proud]

so if I understand, less demand for equities means lower prices. More demand for other asset classes perhaps. How many articles have you read about new asian middle class buying realestate? How about Indians that purchase gold? Course if there is all that $$ in savings and CDs then wouldn't that mean it will be cheap to borrow? Banks gotta do something like you say. So RE, Gold go up, bond returns sux, equities - I'd still bet that your going to get something if business sells more and makes more $$. Perhaps more dividends?

I think it was on 60 minutes they had the info on the Indians investing in gold... and they seem to hint that it is one of the reason that gold is going up...

Yes, less demand for equities means lower prices... but they were talking about the need for equity, not buying and selling stock (equities)...

If a business needs equity to grow, they have to pay something to get that equity... either in dividends or the ability to grow the price of the stock because of internal growth (think Apple with $100 bill in cash)...

So if the emerging market is not putting their money in the bank as the article said and buying RE, gold, etc. etc. then the price of those are going up...

 

[Gone4Good]

If a business needs equity to grow, they have to pay something to get that equity... either in dividends or the ability to grow the price of the stock because of internal growth (think Apple with $100 bill in cash)...

The most common way to sell something that doesn't have a lot of demand is to lower the price. Lower prices would indeed increase dividend yields and expected future returns . . . but at the expense of existing shareholders.

 

[Texas Proud]

The most common way to sell something that doesn't have a lot of demand is to lower the price. Lower prices would indeed increase dividend yields and expected future returns . . . but at the expense of existing shareholders.

True... that is where my thinking was wrong... if you are a new investor it is good... but one already invested... not so good...

 

[GrayHare]

Another possible scenario is that U.S. Boomer investment dollars are so important that their absence will depress asset valuations throughout the entire world. That doesn't seem reasonable to me either.

Agreed, plus the boomers will not be simply burning their investment dollars, but rather converting them into goods and services, medical in particular one would expect. Those companies and workers will have more funds to invest, some of which will go right back into equities.

 

[bld999]

The writer makes his case primarily on the retiring-vs-new worker ratio, not the old boomer population lump argument. Working certainly doesn't hurt an investor's prospects, but it is not always necessary for investment. Money has to go somewhere, and he mentions Japan, I heard that that culture [households] traditionally put it in post office savings accounts. Maybe if they had USA habits, the outcome would have been different.

I looked over at Calculated Risk and found a neat time lapse graph that shows population classes over time, and it tends to show a dilution of the "boomer lump" about now and in the future. Boomers had some kids, they are back a ways on the trail, but coming. They need homes, goods, places for investable cash, etc. That seems to leave prediction of behavior in the future to support the argument. Maybe that's why R.Shiller is looking at those effects.


Calculated Risk: U.S. Population Distribution by Age, 1950 through 2050