The “Golden age” of the investment ends, follows from the report “Reducing profitability: what could cause investors to reduce expectations,” prepared by McKinsey global Institute and McKinsey expert group for strategic development and corporate Finance. The analysis shows that over the next 20 years the total income from investments, including dividends and growth in the value of securities, may be significantly reduced compared to the level at which it was in the last three decades. It may come as a shock to investors who believe in McKinsey. Because most of them were born and lived most of his life in the “Golden age” and for a long period of low returns will require painful decisions, will hit the normal life.
The authors of the study analyzed the profitability of various types of investments in the US and Europe over the last hundred years, and found that the last thirty years were the “Golden age” for investors. The real yield (adjusted for inflation) of investments in shares of the USA and Western Europe averaged 7.9% per annum, in bonds in the U.S. — 5% per annum in Europe — 5,9% per annum. For comparison, in the last hundred years the average real rate of return of an investment in shares in the USA was 6.5% in Europe and 4.9% per annum. Investment in bonds has brought in the last hundred years is 1.7% of U.S. and European investors.
This situation is unique, the study authors write. Investors could receive a windfall due to the “extremely favorable confluence of economic and business factors, many of which have outlived their usefulness”. Partner “McKinsey” Semyon Yakovlev calls these factors: low inflation and interest rates, the growth of labor productivity due to new technologies, and increasing demand from China.
This “Golden era” comes to an end: in the next ten years inflation, and with it the rate will be higher, the growth rate of the Chinese economy will slow, and new technologies in the developed world already in place.
McKinsey experts believe that the situation can develop in one of two scenarios. Or slow growth, suggesting the stock returns in the US market in the next 20 years at the level of 4-5%, and the bond is 1% or higher growth, but still lower than in the previous thirty years. A similar result specialists McKinsey received and for Europe.
The majority of today’s investors lived their professional lives, set aside and invested in a period of high returns, and many have already got used to the idea that future earnings will match last. Now they have to either save more or work longer or later retire. For example, many American families invest in stocks: in 2014, they held $18.4 trillion in stock and $6.8 trillion in bonds. Now a mixed portfolio brings on average 6.5% per annum. If its yield drops to 4.5% per annum, as McKinsey predicts, the investor, to ensure the same income in dollars in old age will have to work for seven years or longer to be postponed twice.
Public and private pension funds and insurance companies is much stronger tied to fixed income instruments. So, insurance companies more than 60% of the assets invested in such securities. The decline in their yields could increase the deficit in the state pension funds and force them to seek more lucrative investments. But insurance companies can benefit from a gradual increase in rates.
Asset managers have to look for new opportunities to generate income. One option for them may be the inclusion in the portfolio alternative assets, such as investments in hedge funds. Such alternative investments today account for about 15% of assets under management around the world.
The end of the “Golden age” of the Western stock market may play into the hands of developing countries, including Russia.
“One of the consequences of falling profitability of investment in different assets in developed markets — is that investors will seek more risky and therefore more profitable assets. This opportunity provides emerging markets. Most of this process will benefit those markets that can provide investors with conditions for investments”, — said Yakovlev. He suggests that the attention of investors in attracting companies from developing countries, which will be a faster pace to introduce new technologies and thus increase their profitability.