New paper from Jim McCaughan outlines long-term trends likely to impact investors
April 27, 2015 –(BUSINESS WIRE)–The future of capital markets may be impossible to predict, but it is possible to identify trends likely to impact capital markets in the coming years, according to Jim McCaughan, CEO of Principal Global Investors, in the new paper “Unlocking the Future of Capital Markets.”
“Like a sort of financial physics, the world exerts a force on capital markets at least equal to the force that capital markets exert on the world,” writes McCaughan. “So when we broaden our gaze to include happenings outside of the investment realm, we can identify forces that will affect them.”
McCaughan explores broader societal trends and hones in on four forces likely to have a significant impact on capital markets:
Seismic demographic shifts are occurring around the world, and aging populations are increasingly looking for income.
Urbanization and Re-urbanization
People are also on the move. In the emerging world, what had been primarily rural populations are now moving into urban areas for employment opportunities and a chance at a middle-class lifestyle. In the developed world, the trend of suburban living is reversing, with potentially dramatic impacts.
Structural Oversupply of Commodities and Manufactured Goods
There seems to be too much stuff. The global economy appears to have developed a structural excess of both manufactured goods and commodities, which could have significant influences on inflation expectations for years to come.
Technology and Infrastructure
Finally, advances in technology have the chance of drastically altering our relationship with our infrastructure system.
“Just like the headlights of a car on a foggy night give us a decent idea of where that car is headed in the next few seconds, these trends can give us a glimpse of the likely path capital markets could take in the coming years,” said McCaughan.
“Our responsibilities, as participants in those markets, are to examine that evolution, follow those trends and challenges, and most importantly, develop solutions for the future.”
EXCERPTS from Unlocking the Future of Capital Markets:
Demographics – Everyone's Chasing Income
Populations around world are aging. In the United States, a generation of baby boomers are now in their 50s and 60s and make up around one-quarter of the U.S. population. Though, this aging trend is not just a U.S. phenomenon. It is true in Japan, Europe, and even China…anywhere you find a rapidly aging population and a shrinking workforce. More and more people are winding down their working lives, working fewer hours, and moving towards and into retirement.
This means that there are an increasing number of people who have accumulated assets as part of long-term savings programs. However, as these aging populations make the transition towards retirement, their priorities change. They move from accumulating assets to supplementing an income. Amassing a retirement “nest egg” becomes living off that nest egg. Working for your money transitions to making your money work for you. This portends an excess amount of savings looking for fixed income and other yield assets.
I feel that this creates a structural overhang in capital markets. With increased amounts of capital chasing the same assets, I believe that yields on bonds, real estate, and similar yield-producing assets are likely to be structurally lower than they would have been. Of course, this puts pressure on investors looking for income and yield
The answer of where to find income will differ for investors. Some will seek out bond funds, others diversified-income strategies. But, the effects aren't just a problem for individual investors and retirees; they could spread throughout capital markets. Even those people who look to annuities or guaranteed products coming from insurance companies will be affected. Insurance companies will also need yield-based assets to fund those annuities.
Technology and Infrastructure – Innovation and Obsolescence
Technology improves and the world reacts. When the automobile became affordable and the world clamored for Henry Ford’s Model T, the horse paths and mud-clogged thoroughfares were no longer sufficient to efficiently support the world’s changing transportation needs. The world needed and built roads, bridges, and tunnels. I believe we are at the cusp of another such period, and the effects could have massive implications for the utilization of capital. As I mentioned earlier, companies from industries as varied as Mercedes and Google have announced plans to debut partially autonomous or fully autonomous vehicles for the public within the next five to 10 years, and I think represents a potential sea change for our transportation infrastructure.Our responsibilities, as participants in those markets, are to examine that evolution, follow those trends and challenges, and most importantly, develop solutions for the future
Our society has become more risk averse over time. The fire during the Apollo I launch simulation in 1967 that claimed the lives of three astronauts, if it occurred today, would likely have ended the space program altogether. The public has little tolerance for what they deem unnecessary risk. I see this playing a factor as driverless vehicles begin to debut.
Human error is the sole cause of over 50% of all traffic accidents, and is a contributing factor in over 90%. With over a million people worldwide dying in car accidents every year, and over 30,000 deaths in the United States alone, the safety implications of a technology that can virtually eliminate those fatalities are staggering. A driverless car can see 360-degrees. It doesn’t get distracted by a text message. It doesn’t get tired. It doesn’t get intoxicated. I believe that as the technology proves itself, the public will essentially demand its rapid adoption. Just like seatbelts. Just like anti-lock brakes. Just like airbags. Driverless cars will be the next major safety system. In 20 years, driving your own car could be seen as anti-social as smoking is today. This is what will drive their rapid adoption.
About Principal Global Investors
Principal Global Investors is a diversified asset management organization and a member of the Principal Financial Group®, with expertise in equities, fixed income and real estate investments, as well as specialized overlay and advisory services. Principal Global Investors manages $342.9 billion in assets1 primarily for retirement plans and other institutional clients2.
About the Principal Financial Group
The Principal Financial Group® (The Principal®)3 is a global investment management leader offering retirement services, insurance solutions and asset management. The Principal offers businesses, individuals and institutional clients a wide range of financial products and services, including retirement, asset management and insurance through its diverse family of financial services companies. Founded in 1879 and a member of the FORTUNE 500®, the Principal Financial Group has $530.3 billion in assets under management4 and serves some 19.9 million customers worldwide from offices in Asia, Australia, Europe, Latin America and the United States. Principal Financial Group, Inc. is traded on the New York Stock Exchange under the ticker symbol PFG. For more information, visit www.principal.com.
1 As of Mar. 31, 2015.
2 Principal Global Investors is the asset management arm of the Principal Financial Group® (The Principal®) and includes the asset management operations of the following subsidiaries of The Principal: Principal Global Investors, LLC; Principal Real Estate Investors, LLC; Principal Enterprise Capital, LLC; Liongate Capital Management LLP; Spectrum Asset Management, Inc.; Post Advisory Group, LLC; Columbus Circle Investors; Edge Asset Management, Inc.; Morley Financial Services Inc.; Finisterre Capital, LLP; Origin Asset Management, LLP; Principal Global Investors (Europe) Limited; Principal Global Investors (Singapore) Ltd.; Principal Global Investors (Australia) Ltd.; Principal Global Investors (Japan) Ltd.; Principal Global Investors (Hong Kong) Ltd.; CIMB-Principal Islamic Asset Management Sdn. Bhd.; and the majority owned affiliates of Principal International, Inc. Assets under management includes assets managed by investment professionals of Principal Global Investors under dual employee arrangements with other subsidiaries of The Principal and assets managed in accordance with investment advice provided by Principal Global Investors through the delivery of a model.
3 “The Principal Financial Group” and “The Principal” are registered service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.
4 As of March 31, 2015.