Is the future of investment markets sustainable? Reality or ideology?
A global debt crisis. Historically low investment yields. The double-whammy of an ongoing population boom and an increasingly ageing society. As the world adapts to a changing social and economic landscape, we consider the effects on the future of investment markets – and the impact on individuals.
For at least 50 years, governments, companies and individuals across the world have been on a borrowing binge. And while the resulting mountain of debt has helped fuel economic growth over that period, the implications for the future of investment markets may not be so positive. As the world tries to rebalance its revenues against its outgoings, it is highly likely that growth in years to come will be lower than it otherwise might have been.
Is the future of investment markets just about chasing diminishing returns?
To combat the effects of the global financial crisis, Central Banks have rolled out unconventional policy measures such as ultra-low interest rates and extraordinary monetary stimulus. Consequently, investors worldwide have been driven further up the risk spectrum in the hunt for income. And with many trillions of dollars of government bonds now offering negative yields, this may continue for some time.
The result of lower yields has been ever-higher asset valuations. This is perhaps most evident in fixed-income markets, where we have only recently witnessed historic lows in yields. But it is also evident in other asset classes, with commercial property and equities also seeing a ramp-up in valuations to sometimes disconcertingly high levels. Compared with fixed income these valuations may appear reasonable – but are they realistic? Valuing one thing off the value of something else that stands at a peak is not a sure-fire way to make money in the longer term.
Conversely, there appears little evidence that many trillions of dollars of quantitative easing has produced what Bank of England Governor, Mark Carney, once called ‘escape velocity’ for the real economy.
A growing state of inequality
This environment has given a huge boost to those with financial and property assets, who tend to be older on average, but has excluded those without. The result? Widening income inequality, social exclusion, political polarisation and generational inequality.
What’s more, we can’t ignore the conflicting demographic pressures around the world. The global population is increasing by around a billion every 12-13 years, while in the developed world ageing is taking its toll on economic vitality. Ask how many 30 year olds can afford to buy even a starter home in London, for instance.
The future of investment markets – a wider view
It is the burgeoning ranks of pensioners in Japan, Europe, China and North America who most require the stable, quality investment yields that have become especially scarce – and who may be forced to sell down their capital to fund their retirement lifestyles. Meanwhile, in emerging markets, the vast increase in population is clamouring for capital investment to fund their development, yet may suffer from a lack of developed-world capital to fund it.
Prepare for the long haul
The future of investment markets is always difficult to predict, but it is particularly tricky in these uncertain times. We are facing serious headwinds, but recent experience can offer some useful lessons for investors today and tomorrow. The drag on economic growth, as we move to a more sustainable environment, is likely to last a long time, and we must get used to this new normal.
Now, more than ever, it’s crucial to plan for saving and investment and to start on the road to building a lump sum for retirement as early as possible. Otherwise, great expectations could become great disappointments.
Your capital is at risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.