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Higher rates. Lower rates. Volatility. Complacency.
As investors attempt to navigate the swirling waters that are the financial markets, it can be easy to lose sight of longer-term, structural developments in favor of more ephemeral trends and fads. But if you ignore the overwhelmingly powerful forces that are here to stay—and that will likely have a profound impact on global markets—you do so at your own peril.
I’ve often written about the impact of technological innovation on The Blog, but there is another equally important dynamic that long-term investors need to be aware of: demographics. More specifically, the world’s aging population.
Aging population and global growth
Put simply, global growth is likely to remain lower than it has historically been because aging populations generally draw more from the economy than they contribute to it. And make no mistake: populations are rapidly aging in most developed countries. Indeed, the proportion of the developed market population older than 60 years was roughly 15 percent in 1975, but is expected to double to 30 percent by 2025, according to United Nations estimates.
Source: The World Bank
And this phenomenon is occurring at a time when the demand for income is nearly insatiable; the continued lack of fixed income supply, especially in longer-maturity debt, seems likely to continue to hold yields down.
What this all means for investors is that monetary policy is likely to stay very accommodative, and global economies will remain in a low-rate cycle for a long time, even if central banks decide to lift rates from near-zero levels of today.
Region-specific monetary policy and overall impact
Consider the regional differences among the world’s developed market countries. Japan, Germany, France and Italy are aging far faster than the U.S., Mexico and India. By some estimates, according to Haver Analytics data, Germany and Japan may see their working-age populations drop by nearly 20 percent through 2038. Meanwhile, the U.S. is expected to see its working-age population expand at a mid-single-digit pace, and emerging economies such as Mexico, Indonesia and India could see growth of between 25 percent to 30 percent in their working-age populations.
Why does this matter? Because there is symmetry between working-age population growth and potential economic growth. In other words, monetary and fiscal policy in places like Germany and Japan is going to have to work hard to offset the negative secular population trends in those countries. (It should be noted that Germany, unlike Japan, has benefited greatly from a surge in younger immigrants.) But in the U.S. and other countries where the working-age population is growing, there should be more policy flexibility and better prospects for solid economic growth.
It’s also important to remember that in regions that are fighting major structural headwinds there will be a greater degree of policy risk, and those risks can create market distortions. Short-term distortion influences present opportunities, but long-term distortion makes investing more problematic.
The impact of these various demographic trends is likely to be that inflation will be secularly lower than it has been in the past, and attempts by central banks to raise inflation may ultimately be challenged. In fact, central bank mandates that are focused solely on driving inflation higher to “target levels,” or those that remain too “patient” due to muted inflation on the road to policy normalization, run the risk of creating market distortions.