Advisers have been closely watching the recent rise in bond yields amid ongoing talk about the end of the global bond bull market.
There will no doubt be an uplift in bond yields as economies continue to recover from the global financial crisis and official interest rates rise. Advisers are rightly concerned about the potential for capital losses on yield assets.
But we believe that one of the world’s megatrends - an ageing global population – will put a cap on yield rises over the very long term, which means that advisers shouldn’t be guiding clients away from asset classes such as global listed infrastructure and global listed real estate just yet.
Indeed, with an ageing population set to depress yields in coming decades, those income-generating assets could prove vital in helping clients to meet their long-term goals.
Not just a Greek Tragedy
Have you felt you’re working harder just to stand still? Many workers around the world are feeling just that, and there is one powerful reason for that: there are simply fewer younger productive workers to fund retirees.
This situation is particularly bad in Greece, where people have stopped having kids and medical advances mean people lived longer.
But the problem is evident in most developed countries. Every 100 people of working age in the OECD today (aged 20 to 64) supports 65 people who are either too young or too old to work. That’s expected to surge to 90 people by 2050. So in 2050 if you’re still working, your efforts will effectively go to help support another person.
This demographic shift poses challenges for Governments, not least the ongoing provision of appropriate infrastructure and care.
But the shift has two powerful impacts with implications for investors.
A war for workers
The first is a battle for talent.
How will Governments fund their retirees? They can cut pensions, or they can increase the number of workers. We all know that cutting pensions is politically unpalatable, even impossible, so countries need to attract workers. The easiest (and thus most likely) political fix is to try and steal your neighbour’s best talent and have them pay for your needy.
Like any war there are going to be winners and losers. The nations and cities that can attract a greater, skilled workforce will be better placed to pay for their retirees.
We believe the world’s financial, cultural, and political hubs – that is, those urban centres often referred to as ‘gateway cities’ – will be best placed to continue to attract global talent. This presents an opportunity for investors in terms of the real estate and infrastructure that is required as these cities grow in size and importance, and the advantage held by incumbent landlords and operators in these locations.
Low yields for longer
But there is a second, even more powerful impact of the demographic shift: depressed yields for the next 50+ years.
The bulge of retirees need to invest to generate income. Because there are so many, their capital will swamp the demand for capital from young people looking to borrow to pay for education, have kids and buy homes.
There are a lot of things that go into determining something like the long bond rate, but an excess of capital flooding markets from retirees will see downwards pressure on long bond rates.
That means the importance of income-generating assets will continue in the long haul, whether the bond bull market ends or not.
The ongoing role of listed global infrastructure and real estate
We believe that two asset classes – global listed infrastructure and global listed real estate – particularly, are going to play an increasing role in helping advisers navigate the investment environment caused by this global demographic trend.
There is a strong element of resilience in both real estate and infrastructure because of the intrinsic value of the cash flow these asset classes tend to generate.
Infrastructure investments will also be vital to hedge against the impact of demographic flux. Infrastructure is an essential service; there is always going to be a need from any demographic cohort to use a toll road or water utility.
If you’re looking for inflation protection, attractive yields, strong cash flow generation and tangible assets in winning locations, global listed real assets is fertile hunting ground.
A megatrends’ edge
As an adviser, it’s hard not to get lost in market volatility – how will Trump affect stocks? Are rates going up? Are Aussie stocks overvalued? It’s particularly difficult when clients are emotionally invested in the short term.
But an adviser needs to navigate the short and medium term, but also maintain an eye on the longer-term horizon.
A short-term focus, particularly on rising yields, could mean turning away from the assets best placed to deliver on client goals over the long term.
We believe stepping back sometimes and looking at the ‘megatrends’ that are driving the world is one of the best ways for advisers get a strategic advantage over others and to add value for clients.
These megatrends have major implications for long-term investment returns and the role of asset classes such as global listed real estate and global listed infrastructure in client portfolios.
Indeed, without those asset classes, amid an ageing population, your clients won’t be best positioned to meet their long-term goals.
This article was based on the Intergenerational Theft
whitepaper. Click here to read the full whitepaper.
About the author
Matthew Hoult, Head of Global Listed Real Assets
Matthew Hoult is AMP Capital's Head of Global Listed Real Assets, overseeing the Listed Real Estate and Listed Infrastructure teams. Mr Hoult joined AMP Capital in 2011 as Head of Listed Real Estate and was promoted to Head of Listed Real Assets in November 2016.
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