Trump and farewell indexing

Posted: November 30, 2016 in Uncategorized

Inflation is coming back. What does it mean?

From an in depth study of Mckinsey  you can gauge that returns from shares and bond have been very healthy from 1985 to 2014 (respectively 7.9%pa and 5.4%pa).

Why?

-inflation declined steadily

-real interest rates fell

– Demographic (including Russia and China becoming Westernized)

-productivity gain due to automation

-profit growth due to globalization

The next 20 years will be different (and nothing to do with Trump)

-inflation is so low it cannot fall

-demographic decline as old age takes over the developed world

-technology allows much more competition

Under this condition McKinsey sees a share investment producing circa 5.5% annually and a bond investment 2-3%.

I do agree with their vision, with some modification.

The report is correct, but aimed to institutional investor, so it does refer to mega blue chips and government bonds where there is enough liquidity for the instos to operate.

A nimble no large cap (which are most of the index) can still work.

But the hottest item that this report highlights is a “funding Gap” for industry fund and large institutional investors.

As industry fund are still forecasting a 7%pa to 9%pa return to fund their expenses (our pensions or insurances), a funding gap is a big issue.

A decline of 3%pa of the overall portfolio of an industry fund worth say USD425 billion dollars would provoke a funding gap of USD13 billion over 30 years even in the best scenarios (in the worst – 10 years).

This will be a big issue that people will start talking in 5 to 7 years. But the game starts in 2017.

PS. It is far, but not too far….in a post in August 2013 I posted that in 2017/2020 Europe will have a big issue with the anti Europe parties. It seemed so far!

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