higher inflation
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The next decade: investor insights into pivotal megatrends
For the past 40 years, our world has been shaped by four megatrends: globalisation, expanding workforces, economic growth over environmental sustainability, and growing wealth inequalities.
the four megatrends. The four megatrends shaped economies, generally suppressing input and labour costs while lowering low inflation, nominal and real interest rates, and the cost of capital.
Times have changed. Inflation is back, rates are higher and capital no longer cheap. In the next decade, we envisage four simultaneous shifts driving a complete reversal of the previous paradigm. These new megatrends are:
Regionalised world
Working-age deficit
Environmental transition
Balancing capitalism
Each will be disruptive, generating specific investment risks and opportunities. They will contribute to structurally higher inflation, nominal and real rates, and an increased cost of capital. But this will not necessarily imperil portfolios.
To understand investors’ perspectives on these megatrends, we surveyed more than 1,800 senior institutional and wealth-management professionals in North America, Europe and Asia.
The four megatrends shaped economies, generally suppressing input and labour costs while lowering low inflation, nominal and real interest rates, and the cost of capital.
Times have changed. Inflation is back, rates are higher and capital no longer cheap. In the next decade, we envisage four simultaneous shifts driving a complete reversal of the previous paradigm. These new megatrends are:
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|
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Regionalised world |
Working-age deficit |
Environmental transition |
Balancing capitalism |
Each will be disruptive, generating specific investment risks and opportunities. They will contribute to structurally higher inflation, nominal and real rates, and an increased cost of capital. But this will not necessarily imperil portfolios.
To understand investors’ perspectives on these megatrends, we surveyed more than 1,800 senior institutional and wealth-management professionals in North America, Europe and Asia.
regionalised world.
Globalisation prevailed in the last four decades. This has been characterised by a strong alignment of fiscal policies between the main economic powers and relatively little geopolitical tension until early 2022. These factors led to greater economic integration, efficient global supply chains, lower costs and inflation, and reduced currency volatility.
However, escalating US-China rivalry, the Covid-19 pandemic, and wars in Ukraine and Gaza have exposed weaknesses in countries’ supply chains in key areas including advanced technologies, energy, food and medicine. Protectionism, nearshoring and friendshoring are now challenging globalisation. In our view, the next decade will see governments and corporates implementing strategies to compete in a more regionalised world.
Investing in domestic production and reorganising supply chains are likely to drive inflation higher – particularly as this coincides with other megatrends, such as the shrinking of the global workforce and the environmental transition.
34 %
31%
geopolitical conflict
29%
lower growth
28%
disorderly
green investment
27%
stymied innovation
46%
growth of domestic industries
46%
development of new or diversified supply chains
41%
Talent retention (i.e., no ‘brain drain’)
Source: Silvercrest, Censuswide at January 2023. For illustrative purposes only.
working-age deficit.
Over the last 30-40 years, the global labour force expanded on an unprecedented scale. This was driven by the post-WWII baby boom, women’s increased participation in the workforce, and Eastern European and Asian countries – especially China – being integrated into global supply chains.
This labour boom has supported rising levels of GDP while generally helping to suppress wage growth. However, we predict that over the next five decades, the global workforce will shrink by approximately 4%-5% every five years1 and this working-age deficit is likely contribute to higher inflation.
At present, Japan, Europe, the US and China are all forecast to have rapidly shrinking working-age cohorts and large ageing populations. Among investors, the US is perceived as being the most vulnerable, despite its overall openness to immigration and China facing an arguably more precipitous demographic cliff.
56%
Investing, or planning to invest, in companies geared towards ageing populations – e.g. healthcare firms, private pension providers, tourism and leisure companies
50%
Investing, or planning to invest, in artificial intelligence (AI), robotics and automated solutions to compensate for shrinking white- and blue-collar workforces
35%
Avoiding, or planning to avoid, countries with the most severe population ageing (e.g. Japan, China)
Source: Silvercrest, Censuswide at January 2023. For illustrative purposes only.
environmental transition.
Despite its immense worth to the global economy, natural capital has not been properly valued. Nor have the damaging impacts – such as emissions, biodiversity loss or plastic waste – of environmental exploitation been accounted as costs. This has kept input costs low and externalised the expenses of environmental damage, helping to suppress inflation.
But the free ride is over. For planetary and economic sustainability, the economy must be rewired to a net-zero, nature-positive model. At Silvercrest, we believe the scale of change needed makes the environmental transition a serious question of asset allocation for investors, rather than a niche exposure in select asset classes.
According to our research, this view is shared by many professional investors. Almost nine in 10 (88%) investors surveyed say that the environmental transition is important in their asset allocation decisions, with those in Italy, the UK and Switzerland showing the greatest conviction.
47%
Listed equities of companies offering sustainable solutions that are economic and scalable
44%
Physical commodities needed for green infrastructure and technologies
44%
Financial markets for externalities (e.g. carbon)
42%
Investment in land/forestry projects as carbon sinks
45%
Trade friction or disputes over essential resources
44%
Weakening of environmental policies or commitments by governments
41 %
Countries’ non-compliance with climate/nature targets
40%
Economic recession, and a related fall in capital expenditure
Source: Silvercrest, Censuswide at January 2023. For illustrative purposes only.
balancing capitalism.
Over the past decade, we’ve seen a substantial increase in corporate return on capital employed while wages have remained stagnant. In Western economies, the difference between the highest and lowest levels of wealth and pay is the greatest since WWI.
This skewing of profits to capital over labour is unsustainable, in our view. We therefore anticipate heavier taxation on high levels of individual and corporate wealth, combined with better wages for the low and middle classes. This would likely impact corporate tax rates and the consumption power of the wealthy, while providing a boost for middle-class consumers.
In contrast, professional investors do not expect the balance between capital gains and wages to achieve a more equal balance in the next decade, although the disparity between capital gains and income is expected to impact the political landscape over the next decade.
85%
Taxes on corporate profits will likely increase
81%
Taxes on individual wealth (beyond income) will likely increase
77%
Policies for lower and middle-class ages growth are likely
Source: Silvercrest, Censuswide at January 2023. For illustrative purposes only.
investing in the next decade.
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