The current sea of liquidity is the developed world’s response to deteriorating demographics, according to Michael Power, Investec Asset Management Global Strategist. Power has aptly titled his thoughts Waterworld, after the film, explaining the global economy is sinking in this sea.
Of all the explanations, justifications and musings on current monetary policy pursued in the developed world, Power is the first to identify the problems with quantitative easing in light of ageing demographics. Basic economic theory concludes Power is onto something.
Central banks are focusing on monetary policy to stimulate growth but at the same time they are ignoring the economic principles to sustainable economic expansion – population and productivity growth. In the developed world population growth has stalled. Japan has led the way, and the US and Europe are following a similar path.
Traditional economic theory, which central bankers are often tied to in decision making, always assumes populations grow. In today’s economy that cant be relied on, as the developed world illustrates.
At the crux of Power’s thoughts is the correlation between demographics and pricing – over the longer term ageing populations encourage deflation. This makes sense. Older people spend less and are subsequently less reliant on the treasured credit market, which is buoying global growth at present. Japan is a living example of this and Power believes it has been the source of the problem.
Conversely younger, more emerging populations are more likely to suffer from inflationary pressures. The rationale for this is spurred by urbanisation and a rising middle class, something that is no longer happening in the developed world. Consequently, with more people living inside Asia than the rest of the world, even excluding Japan, Power is content on directing capital to these young populations and emerging markets.
Beyond directly investing in emerging markets, Power also explains there are benefits in leveraging on secular trends by investing in companies with direct exposure into emerging markets. This includes your global franchise businesses like Nestle, for example. Investments don’t have to be based in emerging markets, rather just exposed to the burgeoning demographics.
It is clear monetary policy in the developed world is having an overwhelming impact on the psychology of investors as the high tide of liquidity lifts equity markets. But at the same time the demographic profile suggest it could be in vain – economies need population growth to in fact grow.