Is it possible we are facing a medium term outlook, which is obvious but few of us are properly preparing for? A scenario with dramatic consequences for future prices of key assets, especially real assets, such as shares and property?
Are we assuming that the past is the basis for expecting more of the same in the future? Whereas the future is actually going to be nothing like the past.
Let us consider a thought process, one that would suggest a very different outlook than any we may have faced before. An outlook which is very negative for asset prices.
The thought is this: the stock market and the property market are exactly what their names imply, markets – full of buyers and sellers. The price of the assets in those markets (shares and property) are dependent on the supply and demand created by those buyers and sellers. This is simple economics; prices will be heavily influenced and determined by the supply and demand ratios.
In the past 30 years, share prices have increased by about 1,500%, property prices somewhere close to 500%. Prices have gone up – a lot! This has now established a common belief in the universal investment mantra that real asset prices increase over time. You might have to ride out the ups and down along the way but over time, these asset prices increase. You should therefore invest in real assets.
But is it really a universal law, can we truly rely on this? Wouldn’t logic (and economics) suggest that ultimately supply and demand, that mix of buyers and sellers, dictate what happens to prices? And if that is the case maybe the real reason shares and property have gone up over the past few decades is actually down to a simple factor – it has been the period when the baby boomers have come to the fore, with their ever growing wealth providing an insatiable demand for these real assets?
Combine the peak baby boomer years with cheap money and, in the case of property, limited supply, and is it any surprise prices have, on balance, rocketed? In other words the baby boomers have created the backdrop to an inevitable surge in prices for both shares and property?
If this is the case, wouldn’t it be logical to expect this trend to reverse when these affluent baby boomers start to disappear or invest differently or have different requirements (such as retirement income or care fees)? In other words shouldn’t there come a point when the supply and demand relationship changes?
If this occurs then surely prices would reduce? Because after all, once the baby boomers influence starts to disappear, who is coming behind them with the buying power and the demand? Is the generation following the baby boomer generation able to keep the demand at the required level to keep prices increasing?
We think the answer may well be no.
In addition we need to consider the relationship between the numbers of people in work compared to the numbers of people in retirement. The predicted ratios are truly worrying if you trust the demographic forecasts.
Whereas in 2010 there were 1.5 people working for every 1 person retired, by 2040 this relationship will be 1:1. This change from 1.5/1 to 1:1 may look innocuous, but it is not! It is game-changing.
There are two related parts to this. The baby boomers positive influence on prices may well be waning and will slowly disappear, plus economically the contributors (tax paying workers) will be shouldering a weight so heavy they will have no capacity left to create wealth and keep prices increasing.
A way to look at this is to consider the answer to the questions: who will buy your assets in the future? Who will buy your shares, who will buy your house? Where are these people coming from and what money will they have?
All indications suggest that the next two or three generations will not have the same purchasing power when it comes to real assets. They may well be buyers of the assets, but only at far, far lower prices.
This shifting of generational behaviour and the potent contribution demographics will play in this – is likely to be pivotal to future prices. Make no mistake, no-one 20 years ago could have predicted 0.25% interest rates and real long term negative interest rates as becoming the norm. So we should not be surprised if things in 20 years’ time could be very different to what we have come to expect today.
This could easily include asset prices way below today’s levels, in fact we would go so far as to say if you think in terms of buyers and sellers and consider demographics this scenario is not only possible but, it could be argued, based on logic and economics, is actually fairly likely.
Are you prepared for this? Are you invested in such a way you can deal with this (or even profit from it)? Or are you investing today, expecting more of the same tomorrow as per the past three decades?
If you think this idea (long term reduction or stagnation in real asset prices) is a long shot, then please consider one final thought. Is there anywhere in the world that has experienced what the UK is going to experience (demographic wise) in the next few decades? Yes, is the answer – Japan, and we know what happened there. Thirty years of decreasing real asset prices. What’s the working/retiree ratio in Japan? 1:1.
We suggest you consider hard where you invest your money, as the baby boomer windfall for UK prices could be coming to an end.
At Penguin we aim to help you plan and protect your finances and in doing this we want to ensure that your savings and investments, indeed all your financial planning, is structured in a way to cater for all eventualities. We have no idea for certain what will happen, no-one does, but we believe that unusual or different future scenarios are likely and that it is a mistake to simply invest – or plan – for the future based on an approach which assumes long-term trends and outcomes will repeat.
We are here to help you review your positions and, in particular, to help you with long-term cash flow forecasting. This can take into account different future assumptions to check that your financial planning can be made to work (to meet your long term goals) even if future economic, market and social circumstances change beyond recognition from those that exist today.
If you would like a review, please get in touch on 02920 09 19 29 or email email@example.com