7th October 2013
Demographic change, shale oil and gas and the unprecedented central bank intervention in the economy are among the mega trends that HSBC Private Bank is urging investors not to ignore.
In a note issued by Nigel Webber, CIO and Esty Dwek, Investment Strategest, the firm says that investors cannot ignore the broader context when investing for the long term.
The private bank says that the developed world is facing two serious problems: population shrinkage particularly a reduced workforce and an ageing population.
“These are problems because economic growth needs population growth, and particularly working age population growth as well as productivity growth. In addition, older populations mean lower tax intakes and higher social costs, which can exacerbate already precarious government debt situations in Japan and Europe, and are cause for concern in China and Russia,” the note adds.
“The annual population growth rate in many major economies is expected to fall in the coming decades, with the population growth rate already negative in Japan, and the European Union and even China falling below zero – implying that by 2025, the population will be shrinking. The UK growth rate is expected to remain barely in positive territory, while the US will continue to grow, keeping up with India and Brazil”.
The bank says that the working age population forecasts paint a similar picture and that includes in China. The note adds: “Already expectations are falling for the working population by 2020 (or 2050) in Europe, Japan and China. Indeed, it seems that the working population in China peaked in 2011, and has already started to decline.
“The UK is expected to remain nearly flat, while the US is likely to see a big boost to its working age population, in part thanks to its immigration laws, which should allow younger generations of foreigners to join the US workforce in the coming years.”
“In light of these expected developments, we expect US economic growth to remain supported by these trends, while risks to growth for Japan, Europe and China are increasing. The rest of the emerging markets (ex China) should fare better in the next 10-20 years, especially Africa, the Middle East and India, where population growth is expected to be strong”.
HSBC Private Bank says that the discovery of shale oil & gas reserves in many regions have far-reaching implications for the global economy, and for politics, as the cost of energy remains a significant part of many companies’ and households’ budgets.
“Countries with access to cheaper energy in the coming decades are likely to have a significant economic advantage. Interestingly, the shale reserves are generally not in the same countries where oil and gas are found today. This implies some positive developments for countries that will suddenly have access to cheaper energy sources, and negative consequences for countries that may no longer be able depend on their oil exports to fund their budgets. Indeed, northern Europe, Northern Africa, Pakistan, China, South Africa, Australia and many Latin American countries have shale reserves, while the Middle East, India and the rest of Africa less so.”
“The top 6 countries with technically recoverable shale oil resources are Russia, the US, China, Argentina, Libya and Australia. And the top 6 countries with technically recoverable shale gas resources are China, Argentina, Algeria, the US, Canada and Mexico.
“In our view, these new discoveries, as they are accessed, should lead to lower energy prices, as they have done in the US. This should be supportive for the global economy. The US is at the forefront of developing and investing in extraction techniques. This will have a significant impact on US energy imports, which should sharply reduce the US trade deficit over time and support the US dollar.
“Others with such reserves (China, UK, Argentina) are moving towards developing these techniques, but they may still be at least 10 years away. Energy independence for the US and others is a key risk for the Middle East, where most countries fund their budgets through oil exports”.
Finally the note considers what it calls economic experimentation i.e. quantitative easing.
“Massive quantitative easing (QE) by the largest central banks is bound to have long-term implications, but those are as yet unknown. Since 2008, the four major central banks have more than doubled their combined balance sheets, and most remain on the path of expansion. Indeed, even when the Federal Reserve (Fed) does start to taper its asset purchase program, it is only a reduction in stimulus, not a tightening in liquidity conditions,” it says.
“The US and Japanese economies, and even the UK, have benefited from QE and have seen their economies recover. But questions remain: What happens when central banks normalise policies and the flood of liquidity ends? And will central banks be able to manage this withdrawal in an orderly manner? Today, with expectations for reduced Fed support, we are seeing increased market volatility, with a natural impact on fixed income, while equities have managed relatively well. But will this continue? And further out, the main risk may be inflation, as the abundant liquidity could lead to asset bubbles”.
The note says that the US is likely to be the main beneficiary of these very long- term trends. “The country’s growth prospects should be supported by positive demographic trends and the shale energy revolution. This should also translate into attractive stock market opportunities over the long term and USD strength. The emerging markets’ outlook is generally supported by energy improvements including China and positive demographic trends (ex China), and we should see positive trends from many of the region’s countries over time.
“The outlook for the Eurozone appears much more challenging, with negative demographics, ongoing austerity and, so far, little apparent interest in developing its shale reserves. We consequently expect growth to remain low and debt levels to remain high.
“We expect to see a short-term bounce in Japanese activity thanks to Prime Minister Abe’s ‘Abenomics’, but long-term structural obstacles – including demographics and the lack of shale reserves – remain.”