My Citywire column this week is on the biggest thematic of them all – an aging population. It makes the point that figuring what’s likely to happen next with an aging population doesn’t necessarily result in a successful investment strategy. Like everything in thematics land, it’s complicated.
But one point is worth dwelling on – Europe and its aging population.
It has become axiomatic that amongst Europe’s many challenges, population decline and aging are near the top (though not quite as much as Japan). The bottom line – America is younger, Europe by contrast faces dependency ratio problems. QED invest in the US.
That may not be true, say analysts in a recent Morgan Stanley thematic report on global demographics. According to Demographics: Gradually, Then Suddenly, the latest updated projections show that “Europe is about to enter a period of relative “leveling up” (Exhibit 22). From 1990 onwards, Europe was aging about two decades ahead of the trajectory in the US and even more so relative to China. Within the space of this decade to 2030, Europe will be at parity with China and will have closed the growth and dependency gap by half with the US. While this alone cannot solve Europe’s economic and innovative underperformance relative to the US and China, the leveling of the demographic playing field presents the best opportunity in over 60 years for relative growth outperformance….
“ While Europe’s dependency ratio is still likely to worsen than improve, its relative positioning is the most attractive it has been since 1985. This could in turn support relatively superior economic growth outlooks and the comparative attractiveness of Europe to global investors. Given the speed at which demographic and behavioural changes are now occurring, we believe investors should consider this relative demographic outlook in their portfolio construction.”
Back in the US, investors are more focused on short-term challenges, not least the likely arrival of US interest rate increases. Gerry Celaya, strategist at Tricio suggests in Tricio Weekly Talking Points that the US futures implied money market curve (below) “suggests that current expectations lean to the Fed hiking rates within a year (red line). The curve is created by subtracting the relevant futures price from 100, the difference is the implied rate or yield of 3-month USD LIBOR for that contract. An example would be 3-month money in two years, so September 2023 (27-month money). The price is near 99.19 in the futures market, the implied yield is around 0.81%. The chart shows that yields are expected to move higher during summer 2022, well ahead of when the Fed has been suggesting is their timing for an initial rate hike. The Fed is talking about maybe raising rates for the first time in late 2023. The market is saying ‘Nope, you will be on the 2nd or 3rd hike by then, buddy…’. The light blue and dark blue lines show where the implied rates were 3-months and 12-months ago (respectively) to give a reference as to how the shape of the curve has been shifting over time. The Fed meeting this week and the Jackson Hole summit at the end of August will be key for the curve, see if rate hike hopes continue to build?”
SocGen’s Kit Jukes reckons that the Japanese yen is getting ever more undervalued, with predictable results for its current account. He reports that in recent months, the yen has weakened, and it now looks “very undervalued relative to the euro. Indeed, over the last 20 years, the euro has gained 12% in real effective terms, while the yen has lost 36%. It’s lost 8% relative to the euro in the last year alone, taking it close to the weakest levels in real terms, since temporary spikes in 2008 and 2014. For now, with upward pressure on rates elsewhere, the Japanese economy still struggling and a lack of volatility in global markets pushing investors towards higher-yielding assets, the yen doesn’t have much to recommend it. The valuation of the yen won’t send it up in its own, but it does make an even weaker yen hard to imagine. And the current move is big enough that it will help Japan’s term of trade, and will probably be reflected in a widening current account surplus in the next year or so.”
Last but by no means least multi-asset fund Ekins Guinness has just released its latest strategy highlights. Here’s the killer paragraph for me on asset allocation which is 100% equities.
“Equities are becoming expensive in absolute terms, but bonds are even more expensive as real yields are at record lows. Equities remain relatively cheap to bonds. Inflation is almost certain to be higher than generally expected due to excessive broad money growth (and complacency), especially in the USA. This could well propel equity markets even higher due to the weight of money but it will cause an Equity bear market at some stage. This is probably more likely next year than this but it needs to be watched carefully and there will be scares on the way”.