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Megatrends: the next 10 years vs last 50, Pt 1

The stellar gains in global equity markets over the past half a century has been driven by a handful of powerful undercurrents. These undercurrents are dramatically altering their course from right under our feet and investors should not expect the next 10 years to be anything like the past.

" Investors should not expect the next 10 years to be anything like the past."

Over the short and medium term, economic cycles dominate investment outcomes. However, over the long term the relentless demographic and structural undercurrents, or trends, drive investment performance.

The trends may be hidden by economic events like recessions, but on the other side of the recession the trends re-emerge intact.

In this, the first in a two-part series, we will introduce six megatrends which have driven performance over the last 50 years and highlight the changes now occurring.

In this first part, we look at the two major demographic changes and changing tax rates. In the second part we will examine debt, trade and inequality.

Long-term trend one:  Baby Boomers - the pig in the demographic python

Following the Second World War, most developed countries around the world experienced a baby boom - the charts above show the US experience and many other countries share the same basic structure. 

What this has meant is the proportion of workers in the economy has been growing for the last 40 years to 50 years as this age group went from being dependent (under 18) to workers (18 to 34) to prime-age workers (34 to 54).

 Age and sex structure of the population for the United States: 1945 to 2060

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Source: US Census

The effect on the productivity and consumption patterns of the economy from this contingent are well documented - one investment theory is you invest in whatever this age contingent needs next. 

Unfortunately for those of us still working, what they need next is for younger workers to support them in retirement. This means while we have seen the ratio of workers to dependents rising in most countries for the last 40 to 50 years, the trend is changing as the boomers retire.

Dependency Ratios for the United States

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Source: US Census

Long-term trend two: women in the workforce  job done?

Female participation in the workforce has been a key economic driver for a long time, moving women out of unpaid home duties and into the workforce has yielded numerous economic benefits.

Participation Rate for Female Professionals in the US

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Source: US Equal Employment Opportunity Commission

It’s been a classic long-term trend; it can be knocked off-trend by medium-term issues like a recession, but on the other side of the recession, the trend re-emerges intact.

However, the 50 years of gains have come to an end. While women still face issues about equal pay and the number of women in senior positions, it would appear (in aggregate) women are not being prevented from working. It is now a question of whether women want to work.

Labour force participation rate, female (% of female population ages 15+)

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Source: International Labour Organization

Long-term trend three: death and taxes – inevitable (but not for companies)

Another long-term benefit to the stock market has been the falling company tax rate.

Median OECD Combined Corporate Tax Rate (%)

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Source: OECD.Stat

As you can see from the above chart tax rates have basically halved over the last 30 years. Which is a big deal when it comes to earnings – my estimate is somewhere between a 30 per cent and 40 per cent of real (inflation adjusted) market profit growth over the last 30 years has come from lower tax rate.

My rough, back of the envelope numbers for earnings growth over time looks like this:

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So, this trend is not looking like ending anytime soon as we have seen the UK cut taxes recently and we are likely to see a huge company tax cut by Trump.

Is there likely to be a backlash at some stage? The moralist in me hopes so. The pragmatist doubts it is coming in the next five years.

Intermission

In this first part we’ve observed two major demographic changes which have ended, offset by company taxation which continues to fall.

Next week, we will examine debt, trade and inequality before bringing all the themes together and explaining it will affect markets in the period to come.

Damien Klassen is Head of Investments at Nucleus Wealth

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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