World on cusp of major demographic shift that will hit stocks, bonds: Study

Wednesday, 25 February 2015 00:00 - - {{hitsCtrl.values.hits}}

A plastic bull figurine, symbol of the Frankfurt stock exchange is pictured in front of the German share price index DAX board at the Frankfurt stock exchange, 15 January, 2015 – REUTERS LONDON (Reuters): The global “savings glut” that has driven stocks to record highs and bond yields to record lows will soon start to disappear, leading to higher interest rates around the world as populations age, according to a Barclays study. After three decades when workers saving for retirement have been a major source of financial market funding, younger people entering the workforce are gradually becoming outnumbered by those ready to stop work and tap those savings. Barclays says that trend will weigh heavily on financial asset prices in the coming decades. Ageing populations across developed and emerging markets mean the “savings glut” that has driven stocks to record highs and bond yields to record lows will start to disappear, lifting a lid on interest rates around the world, it says. Barclays estimates this shift in savings could be worth almost 3% of global gross domestic product in 10 years, or more than 15% of global savings, rising to nearly 6 percent of global GDP in 20 years, roughly 25% of all savings. “This would be a substantial dislocation of the balance between world saving and investment if it were half the size,” Barclays said in the 60th edition of its Equity Gilt Study. “A key secular driver of world asset prices has peaked and will be fading strongly in the years to come.” Global real investment last year was $13.85 trillion, nearly double the $7.18 trillion two decades earlier. That was led by a surge in investment in China to nearly $5 trillion from just $755 billion. But this is about to reverse, thanks to a rapid rise in the number of people aged 65 and over and much slower in growth in the share of workers aged between 40 and 64. On a global level, a 1 percentage point increase in the share of the elderly is associated with a 1.15 percentage point rise in the real interest rate, while a 1 percentage point rise in the share of mature workers is associated with a 0.75 percentage point fall in the real interest rate. Barclays said it was difficult to estimate the impact on asset prices and interest rates beyond the broad view that interest rates will rise and asset prices will fall. But it said these projected changes are “quite inconsistent” with extremely low or negative 5-year and even 10-year forward interest rates offered in financial markets.