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INVESTMENT, WEALTH & SECURITY


Baby-boomers and bonds


As demographic factors across Asia buoy the prospects for fixed-income investment, rumours of the death of the long bull market in bonds may be exaggerated, writes Brian Sturgess.


T 300%


INCREASE IN CHINA’S PROPORTION OF PEOPLE OVER 60 IN NEXT THREE DECADES


he short-term outlook for fixed-income investors does indeed look very choppy as the Federal Reserve seeks to ‘taper’ its quantitative easing programme which has


been injecting US$85 billion per month of demand into bond markets. Since Fed chairman Ben Bernanke signalled several


months ago that the central bank would consider a qualified end to the process of massive monetary support for the US economy, the yield on 10-year US Treasuries has risen from 1.6 % to 2.88% between May and August. Meanwhile, the uncertainty has caused the global supply of corporate bonds in August to fall to a five-year low. But bond optimists are analysing demographic


trends that could significantly bolster the global demand for fixed income securities in the longer-term. A large cohort of ageing baby-boomers who fuelled the demand for equities during their working lives are expected to buy more bonds. A great deal of research demonstrates that wealthy people nearing retirement shift the allocation of their personal investments away from risky equities to the less volatile corporate bond and sovereign debt markets. As the accompanying chart based on United Nations data shows, the profile of the population of the developed world will continue to age. The proportion of the total population aged 60+ – already high at 32% in Japan – will expand from 20% to 29% between 2012 and 2050 in Australia; from 17% to 39% in South Korea; and from 19% to 27% in the US. The influence of demographics on asset returns and


portfolio allocation is an expanding research area. Much interest has been sparked off by the case of Japan. In a recent speech, Sayuri Shirai, a member of the Bank of Japan’s Policy Board, stated that risk premiums rise as a population ages – investors are prepared to pay less when they are asked to take more risk pointing to the large cash holdings of Japanese savers.


72 FAMILY OFFICE: THE FUTURE Ms Shirai says that ageing households with financial


resources tilt even more heavily towards ‘safe’ assets, such as deposits and bonds. “This makes sense since elderly people are more


concerned about the stability of the valuation of their financial assets and thus tend to be more risk-averse than younger people,” says Ms Shirai. But the economics of ageing is a global issue


as better healthcare and longevity combine with decades of past GDP growth in placing a higher proportion of wealth in ageing hands. It is also likely be as important for some of the emerging markets as for the OECD countries, particularly given the sheer size of the populations in these countries that are accumulating wealth. Even China will see almost a tripling in the proportion of the people over 60 in the next three decades, while its working age population is set to peak in 2020 and begin to fall quickly afterwards. Pessimism about the long-term prospects for


equity returns combined with institutional investors recognising their clients’ needs could continue to switch asset allocations towards fixed income. Research carried out by professors Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School and published in the 2013 Credit Suisse Global Investment Returns Yearbook is particularly downbeat about equities in developed countries. This report predicts that the average real return from investing in global equities is likely be somewhere between 3 and 3.5% over the next couple of decades. The Credit Suisse Yearbook also showed that the


high-equity returns realised by investors between 1981 and 2008, a period when growth in GDP per capita was above long-term average rates for the US and the UK, were abnormal in a historical context. The long- term switch may be already occurring. The annual survey on asset allocation carried out by by Mercer since 2003 reported in May of this year that the


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