The pivotal determinants behind financial market yields are to be found in savings formation and demography, according to the economists of Allianz Group and Dresdner Bank in a new Working Paper entitled “Demography, savings and yields: long-term outlook”. In the coming decades savings patterns over the life-cycle will be substantially more pronounced than to date.
With relatively more capital flooding onto the market, this means that up to 2020 the return on capital is likely to fall. Thereafter, the dissaving process and heightened inflation risks will push yields back up somewhat.
The industrial countries have made major progress in controlling inflation over the past 20 years. Inflation is also kept in check by external factors such as globalization. However, for the post-2020 period, investors should pencil in higher inflation as a renewed risk. On the one hand, governments are likely to resort in part to higher deficits to confront the demographic challenge. On the other, it is not certain that the intensification of global competition will continue unabated.