lens: growth, debt, asset prices & pensions Dr Amlan Roy - - PowerPoint PPT Presentation

Global macro from a demographic lens: growth, debt, asset prices & pensions

Dr Amlan Roy Global Demographics & Pensions Research Credit Suisse Securities (Europe) Limited, London Email: amlan.roy@credit-suisse.com

Demographics is about “People as Consumers & Workers”

3

Peter Drucker (1999): “Demographics is the single most important factor that nobody pays attention to, and when they do pay attention, they miss the point.”

• Discount rates, Deficits and Debt

D

• Economic growth, Emerging markets

E

• Mortality risk, Mega-cities

M

• Organisation structure & behaviour

O

• Geopolitical Risks

G

• Retirement risk, Real estate, Ratings

R

• Asset prices, Asset allocation

A

• Pensions

P

• Health, Housing

H

• Inflation, Infrastructure, Individuals

I

• Commodities, Current account

C

• Sectors, Society, Sustainability

S

Popular misconceptions

• 1. Demographics is Long-term
• 2. Age-related
• 3. Predictable

Demographics affects income statements and balance sheets

• f

households, corporates and countries.

Source: UN, Credit Suisse Demographics Research

The Growth of the Super-old (80+): challenge that has crept up

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Total population 3,682 7,349 World Population Change: 19 1970 70 vs. 20 2015 15 millions Growth 394% 186% 129% 38% 100% Share of 60+ population

1970 2015

UK 19% 23% US 14% 21% Germany 20% 28% Japan 11% 33% France 18% 25% Italy 16% 29%

Share of 80+ population

1970 2015 UK 2% 5% US 2% 4% Germany 2% 6% Japan 1% 8% France 2% 6% Italy 2% 7%

Source: UN, Credit Suisse Demographics Research

The Growth of the Super-old: EMG6 & South Africa

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Source: IMF, UN, Credit Suisse Demographics Research

Core demographics: EMG6 & South Africa

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Source: UN, Credit Suisse Demographics Research

Life expectancy @ 60: G6, EMG6, South Africa

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Source: UN, Credit Suisse Demographics Research

Population & WAP growth – South Africa & selected countries

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South Africa Angola Egypt Nigeria Ghana Cote d'Ivoire Kenya

Population growth 1970-75 2.66% 2.41% 2.08% 2.49% 2.68% 4.63% 3.62% 2015-20 0.78% 3.12% 1.88% 2.54% 2.16% 2.38% 2.50% Working-age population growth rate 1970-75 3.01% 2.41% 2.53% 2.33% 2.65% 4.82% 3.77% 2015-20 0.94% 3.79% 1.83% 3.02% 2.58% 2.88% 3.20%

Source: UN, OECD, Credit Suisse Demographics Research

Credit Suisse’s Demographic Manifesto (2000)

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Abolition of mandatory retirement ages combined with flexible enabled retirement Increased female labour participation rates with use of technology to facilitate women to better balance work and family Outsourcing and off-shoring Selective immigration policies

Retirement ages: effective & official

Men Women Effective Official Effective Official 2007-12 2012 2007-12 2012 Mexico 72.3 65 68.7 65 Korea 71.1 60 69.8 60 Chile 69.4 65 70.4 60 Japan 69.1 65 66.7 65 Portugal 68.4 65 66.4 65 New Zealand 66.7 65 66.3 65 Switzerland 66.1 65 63.9 64 Sweden 66.1 65 64.2 65 US 65.0 66 65.0 66 Norway 64.8 67 64.3 67 Canada 63.8 65 62.5 65 UK 63.7 65 63.2 61.2 Netherlands 63.6 65 62.3 65 Denmark 63.4 65 61.9 65 Turkey 62.8 60 *63.6 58 Spain 62.3 65 63.2 65 Germany 62.1 65.1 61.6 65 Greece 61.9 65 60.3 63.5 Finland 61.8 65 61.6 65 Italy 61.1 66 60.5 62 France 59.7 65 60.0 65

*White cells: effective retirement age > official retirement age

Source: Credit Suisse Demographics Research, IPE Pension awards key note speech (Noordwijk, 2013)

How increasing Longevity Affects us all?

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• Challenge existing asset & time allocation

frameworks & intergenerational dynamics

Individual & families

• Policy changes in labour, education, health,

pensions & social benefits necessary

Governments & Societies

• Re-assess frameworks & assumptions. Develop

new solutions for clients & new approaches to understanding longevity

Asset managers, pension funds, insurance cos., SWFs.

Source: UN, GGDC, Credit Suisse Demographics Research

GDP growth decomposition – South Africa

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South Africa

Source: World Bank, Credit Suisse Demographics Research

Health expenditure – South Africa & Selected countries

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Source: OECD, Credit Suisse Demographics Research

Pensions

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South Africa: Pension system in in 2012 2012

• Flat rate based in a residency

test

• Pension age is 60 years old for

both women and men

• Not possible to claim the

public pension before the normal eligibility age of 60

• Receipt of the old-age pension

is not dependent on retirement,

Source: World Bank, Credit Suisse Demographics Research

The structure of GDP matters: Different across countries

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National Income Identity: C + I + G + ( X – M)  GDP

C = Consumption, I = Investment, G = Government, X = Exports, M = Imports

South Africa Angola Egypt Nigeria 1980 2013 1992 2013 1980 2013 1980 2013 Household Consumption 47.8 61.9 57.7 50.3 69.2 80.9 55.2 72.1 Government Consumption 14.3 20.3 42.3 19.9 15.7 11.7 14.7 8.1 Gross Capital Formation 29.9 20.1 3.8 14.7 27.5 14.2 34.0 14.7 Exports 35.4 31.0 69.2 55.8 30.5 18.1 29.4 18.0 Imports 27.3 33.2 73.1 40.7 42.9 24.8 19.2 13.0 Ghana Cote d'Ivoire Kenya 1980 2013 1980 2013 1980 2013 Household Consumption 83.9 72.7 62.8 65.1 62.1 81.2 Government Consumption 11.2 16.4 16.9 13.2 19.8 14.2 Gross Capital Formation 5.6 23.8 26.5 19.1 24.5 20.1 Exports 8.5 33.4 35.0 43.8 29.5 17.9 Imports 9.2 46.3 41.2 41.2 35.9 33.4

Openness of an economy is measured by the sum of exports + imports as a ratio of GDP: South A Africa : : 64.2 .2%; ; Angola: : 96.5 .5%, , Nigeria: : 31%; ; Egypt 42.9 .9%, , Japan: : 35.2 .2%; ; France: : 56.4 .4%; ; US: : 30%

Source: UN, IMF, Credit Suisse Demographics Research

GDP, Population and GDP per capita growth

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Source: ILO, Credit Suisse Demographics Research

Economic Activity Rates, Men vs. Women

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Labour force participation rate, , in p percentage

G6, 6, 20 2014 14 EMG6, 6, 20 2013 13

Source: UNDP, Credit Suisse Demographics Research

Income Gap, Men vs. Women – G6, EMG6 and South Africa

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Income multiples of men over women, , 2013 2013

Income measure: GNI per capita in US$, $, constant 2011 2011 PPP

Source: OECD, ILO, Credit Suisse Demographics Research

Rising Youth Unemployment – a threat to growth and stability

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Global youth u unemployment trends, , 1991 - 2013 2013 Youth unemployment by region, , 2013

Source: World Bank, ILO, Credit Suisse Demographics Research

Rising Youth Unemployment – a threat to growth and stability

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Youth unemployment, 2014 2014

*data for EMG6 is 2013 data

Source: OECD, ONS, US Census Bureau, Credit Suisse Demographic Research

Changing global consumers

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Internet users

• Nationality, education and socio-economic groups are also

major influencers of online internet use, not limited to age group

Young adults

• Young adults are entering the workforce and start

accumulating assets later

• They most likely live at their parents house until 28-30

years old

Women

• Are new consumers with increasing no. of them getting

educated, working and becoming richer.

• Traditionally women make certain consumption choices

for the family.

• Today as women are working and getting richer they have

a greater influence in the major family purchase decision such as housing, cars and vacation.

• Share of highly educated women remaining childless into

mid-40s fallen significantly over past 20 yrs.

Key Sectors Impacted by Demographic Change

21 Longer post-retirement life of growing number of retirees. Desire of retirees to enjoy a good quality of life New pharma and biotech needed for mental health and new illness Genomics, pharma and biotech research need to find new cost-effective drugs and treatments

FINANCIAL SERVICES

Active Asset allocation, New product development and Risk Management will be cornerstones DB to DC shifts Newer ways of delivering pensions and insurance Technology

INFRASTRUCTU TURE NATURAL RESOURCES LEISURE & LUXURY

Work-Leisure trade-off changes for old as well as young. Wealth of retirees, ease of travel, ease of shopping Lower costs of communication, travel and insurance Information and Technology advances Changing manufacturing processes/ locations Demands for new products very different from the demand for older products—derived demands too Increased demands for hard and soft

• commodities. Water/Drinking water

supplies Changing needs for infrastructure in developed world Mega-cities growing in the developing world Residential, manufacturing, transport, environmental considerations to name a few

EMERGING MARKETS

Growing importance due to economic power Global labour force Global manufacturing locations Outsourcing Demand side

PHARMA & BIOTECH

“The reason these sectors are positively affected is not merely due to the fact that the number of people in the elderly population has

increased, but also that the composition, family structure and behavioural characteristics of the elderly, as well as the young population, is vastly different compared to the past“

Source: “Benign Neglect of Long-term Interest Rates” (Philip Turner, BIS, Feb 2013

Long-term Interest Rates

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Philip Turner of BIS (Feb 2013)

• “Benign neglect”: long-term rates determined by saving and investment propensities
• ver which central banks have little influence. Long-term rates react in a stabilising

way to economic cycles.

• A need to reconsider current policy frameworks with a view to clarifying the importance of

long-term interest rate for monetary policy, financial stability and government debt management. Credit Suisse Demographics Research View (since Oct 2001)

• Demand for long-term bonds far far exceeds supply of long-term bonds.
• Demand comes from pension funds, insurance companies & reinsurers
• Yield on long-term bonds therefore likely to be low in future as long as excess demand

persists.

Source: UN, Online Data Robert Shiller, Credit Suisse Demographics Research

US: S&P 500 P/E Ratio and Middle/Old Ratio

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Weak correlation for France, Germany and Japan

Source: Bureau of Economic Analysis, US Census Bureau UN, Credit Suisse

Housing and Share of Population Aged 30-44, US

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0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 17.5 18.0 18.5 19.0 19.5 20.0 20.5 21.0 21.5 22.0 22.5 23.0 23.5 24.0 24.5 25.0 25.5 % Real housing price (residential investment deflator/GDP deflator), LHS Share of population aged 30-44, RHS

Real h housing price & s share o

• f p

population aged 3 30-44, , US

Real housing price is the residential investment deflator divided by the GDP deflator

10 20 30 40 50 60 70 80 90 < 25 years 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+

Homeownership rate by age: USA

1982 2013

Source: UN, MSCI, Credit Suisse Investment Returns Yearbook 2014. IMF, Kharas (2010), Credit Suisse

Emerging Markets are “Important & Relevant”

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Source: NBS, Chan (2012), Office of Social Science Administration Shenzhen University

China – labour mobility, migration

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Purpose of saving for young migrant workers in Shenzhen, 2010 2010 Hukou Reform

• Rural vs. urban Hukou holders differ in

consumption patterns largely due to differences in (i) access to education (ii) health care (iii) housing and (iv) social benefits

• Cost of conversion per Hukou is 80,000

RMB per person

• Issue is which of the govts bears the

cost? National, city, municipal, provincial or local.

Source: MDG’s (Asia Pacific) Organisation, City Mayor, UN, World Bank, Credit Suisse

Population Density & Water/Sanitation Access

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Population density, persons per square km France Germany Japan US China India Brazil Indonesia Malaysia Philippines Singapore Thailand Vietnam Hong Kong South Africa 1955 79.5 204.6 242.5 18.7 63.8 137.7 7.5 42.7 21.4 74.4 1865.3 46.4 90.8 2371.5 12.7 1975 96.8 225.7 303.9 23.9 96.5 209.1 13.0 72.2 37.5 138.5 3232.0 82.9 157.2 4147.9 21.2 1995 106.3 234.1 341.5 29.1 130.8 323.2 19.5 108.7 63.1 234.2 4975.2 116.0 242.5 5851.9 34.1 2015 117.6 231.5 347.2 35.2 146.6 441.0 24.9 142.2 92.3 337.7 8005.3 133.0 301.4 6940.9 44.9 2035 126.1 224.9 321.1 39.9 150.0 533.2 27.9 168.3 114.5 437.9 9369.2 132.0 347.6 7674.2 50.7 2055 130.8 209.2 286.5 43.3 140.1 581.6 28.4 179.3 126.2 513.0 9480.1 117.7 365.4 7754.7 54.8

City Country Rank Population Estimate Land Area (sq km) Density (Persons per sq km) Lagos Nigeria 24 13,123,000 907 14500 Johannesburg-East Rand South Africa 42 8,432,000 2590 3300 Luanda Angola 61 5,899,000 894 6600 Abidjan Ivory Coast 80 4,800,000 324 14,800 Nairobi Kenya 82 4,738,000 557 8500 Kano Nigeria 120 3,550,000 251 14000 Ibadan Nigeria 141 3,160,000 466 6800 Pretoria South Africa 154 2,927,000 1230 2400 Kumasi Ghana 185 2,500,000 337 7400 Abuja Nigeria 190 2,440,000 225 10800 City Country Rank Population Estimate Land Area (sq km) Density (Persons per sq km) Tokyo-Yokohama Japan 1 37,843,000 8547 4400 Jakarta Indonesia 2 30,539,000 3225 9500 Delhi, DL-UP-HR India 3 24,998,000 2072 12100 Manila Philippine s 4 24,123,000 1580 15300 Seoul-Incheon South Korea 5 23,480,000 2266 10400 Shanghai, SHG-JS-ZJ China 6 23,416,000 3820 6100 Karachi Pakistan 7 22,123,000 945 23400 Beijing, BJ China 8 21,009,000 3820 5500 New York, NY-NJ-CT US 9 20,630,000 11642 1800 Guanzhou-Foshan, GD China 10 20,597,000 3432 6000

Source: Watson Wyatt, Cass Business School

The “Limits to Life Expectancy” Debate

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Professor James Vaupel’s view Professor Jay Olshansky’s view

• Life expectancy has increased steadily over last 160 years & slowdown is not evident. Life expectancy

is “not approaching a limit”.

• Increases are largely attributable to improvements in old-age survival. If trend continues, life

expectancy in Europe will exceed 90 by 2050.

• The prediction by Oeppen & Vaupel that human life expectancy will rise to 100 years in this century is

astonishing & lacks scientific evidence.

• Mortality declines in past due to reduction in early age mortality & may not repeat.
• Prediction that pace of biomedical advances will accelerate depends on technologies that slow the

ageing process & reduce deaths

Pension Plan Funding and Stock Market Efficiency

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• Does the market value of firms sponsoring pension plans reflect information about their

pension liabilities? Franzoni and Marin (JOF 2006) find that:

• Market significantly overvalues firms with severely under-funded pension plans
• Low returns are not explained by risk, momentum or accruals
• Firms with under-funded pensions have poor operating performance and low returns
• Do firm’s equity returns reflect its pension plan risks? Li Jin, Robert Merton and Zvi

Bodie (JFE 2006) find that:

• Equity risk does reflect the risk of the firm’s pension plan despite arcane accounting rules.

Capital markets are informationally efficient

• But using de-leveraged equity return betas to figure out cost of capital for operating assets is

flawed as it does not adjust for pension risks

Source: Towers Watson (2015)

Pension Fund Asset Allocation: Largest 7 Pension markets

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Pension Fund Asset Allocation (2001 vs. 2014)

2001 2014 Equities Bonds Cash Other Equities Bonds Cash Other Australia 62% 19% 5% 14% 51% 15% 8% 26% Canada 62% 26% 2% 10% 41% 35% 2% 22% Japan 52% 46% 0% 2% 33% 57% 3% 7% Netherlands 44% 44% 11% 1% 30% 55% 0% 15% Switzerland 36% 35% 20% 9% 29% 36% 7% 28% UK 67% 18% 5% 10% 44% 37% 3% 16% US 65% 28% 2% 5% 44% 25% 2% 29%

DB-DC Asset Split (2001-2014)

2001 2014 DC DB DC DB Australia 83% 17% 85% 15% Canada 3% 97% 4% 96% Japan 0% 100% 3% 97% Netherlands 2% 98% 5% 95% Switzerland* 49% 51% UK 8% 92% 29% 71% US 52% 48% 58% 42%

Total Pension Assets - 2014

Total Assets (USD billion) % of GDP Australia 1,675 113% Canada 1,526 85% Japan 2,862 60% Netherlands 1,457 166% Switzerland 823 121% UK 3,309 116% US 22,117 127% Total global pension assets 36,119 84%

*DC assets in Switzerland are cash balance plans and are excluded from the analysis in 2014.

Conclusion

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• Global demographics affect macro fundamentals that influence

economic growth and asset prices

• Financial services industry faces new opportunities and challenges in

terms of new p product development, , risk management and asset allocation

• EM C

Challenges: employment, education, infrastructure key to generating productivity

• Distributions matter (gender, age, income, technology access,

education, employment). . People behaviour matters.

Credit Suisse Demographics Research

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• Demographics of Australia and New Zealand (2015)
• UK’s demographic dynamics and their implications (2015)
• Demographic Focus – Changing Global Consumers (2015)
• EU’s evolving demographics & pensions need attention (2015)
• China’s structural priorities: A progress report in the context of its 12th Five-year plan (2015)
• Joint report with Redington & other partners, “The age of responsibility” (2015)
• Indonesia: Are good core demographics adequate for growth and investments? (2015)
• Why has recent macro-policy not been that effective? A demographic view (2015)
• Thailand’s Aging Society: Economic & Equities Implications (2015)
• Ebola: Current situation, history & lessons (2014)
• A Demographic View: Do not write off US GDP growth (2014)
• World Cup 2014 Countries: Spotlighting Demographics (2014)
• Exploring how demographics affects sovereign spreads (2014)
• Americas’ Demographics & their effects (2014)
• A comparative demographic analysis of EU28 (2013)
• China: Abolishing the one child policy (2013)
• Can the “Asian Tigers” roar back? Demographic insights (2013)
• Demographics, Debt & Sovereign Ratings (2013)
• Demographic insights into policy: Asia’s Big 3 (China, India & Japan) (2013)
• Chinese Demographics – Labour mobility, migration, urbanization & reforms (2013)
• Global Demographics: Spotlight on UN revisions, Conditional longevity and Economic growth (2013)
• Demographic dynamics over business cycles and crises: What matters is how different (2013)
• Rising youth unemployment: A threat to growth & stability (2013)
• European Demographics & Fiscal Sustainability (2013)
• ASEAN’s Positive Demographics Underpins Stable Growth (2012)
• Africa’s Demographic Promise: Opportunities & Challenges (2012)
• Assessing Asia's Demographic Promise (2012)
• ADBInstitute, “Innovative Approaches to Managing Longevity Risk in Asia: Lessons from the

West” (2012)

• How Increasing Longevity Affects Us All?: Market, Economic & Social Implications (2012)
• How Demographics Affect Asset Prices (2012)
• Spotlighting The European Union’s Demographics (2011)
• Assessing Latin America’s Demographic Prospects (2011)
• Macro “Fiscal Sustainability” to Micro “Economic Conditions of the Old” in the “Oldest Five”

Countries (2011)

• Longer Lives, Changing Life Cycles: Exploring Consumer & Worker Implications (2011)
• China: The turning point of the labour market (2011)
• Spotlight on Demographic Giants: China & India (2010)
• From the Demographics Lens: US is definitely not Japan & neither is Germany (2010)
• US Demographics – Favourably Poised for the Future (2010)
• European Demographics at the Core- Consumers & Workers (2010)
• A Demographic Perspective of Fiscal Sustainability: Not Just the Immediate Term Matters

(2010)

• A Demographic Perspective of Economic Growth (2009)
• Demographics, Capital Flows & Exchange Rates (2007)
• Global Demographic Change & Sector Implications (2007)
• Demographics, Productivity & Technology (2001)
• New Jobs, New People: Demographic Manifesto (2000)
• Dr. Amlan Roy, amlan.roy@credit-suisse.com Anais Boussie, anais.boussie@credit-suisse.com Mengyuan Yuan, mengyuan.yuan@credit-suisse.com

questions

thank you