Monday, December 19, 2011

Investing: Farewell Equities?

One of the most popular words these days is the term "decline". We read a lot about the decline of life quality, income, wealth, whatever. Now the McKinsey Global Institute predicts another decline: The decline of the equity ( "The Wall Street Journal" ( abstracts their thesis: "In less than a decade, the world economy could face too many companies wanting to issue equity and too few stock buyers". McKinsey calls this the "equity gap".

The institute justifies their prediction with to 2 alleged trends (
1. "A rapid shift of wealth to emerging markets where private investors typically put less than 15 percent of their money into equities (compared to 30–40 percent in many mature economies)".
2. "In developed nations, such as the U.S., euro zone and U.K., the aging population, growth of alternative investments and regulatory changes will shift investor preference away from equities".

McKinsey claims " that the share of global financial assets held in listed equities could fall from 28 percent to 22 percent by 2020 if these trends continue" and projects a potential $12 trillion “equity gap".

I don´t buy these predictions. There is not alternative to equites. I reckon McKinsey underestimates the power of the rising company profits. The owners of stocks participate in the rising profits of the companies and in the growing global economy. The owners of bonds (debts of the companies) don`t. And the companies will continue to deliver rising profits as long as they are continuing their learning process and are getting more efficient.

I also reckon that investors in emerging markets will lift the proportion of equities in their portfolios in the coming years and will approach the levels common in developed countries. This will be part of the transformation processes of the emerging markets which will adapt to the wealth & security of developed nations. Investors in the emerging markets will become much more wealthier (because of the high growth rates in their countries) and will therefore accept higher risks. The "Economist" ( writes that now "companies in emerging markets are often not as transparent as those in the developed world, nor do they have a record of treating minority shareholders well". I guess that while the emerging markets will become more ripe the companies there will adapt to the global markets and become more transparent, efficient and profitable and therefore more attractive for investors.

I also doubt that the appetite for stocks will shrink in the developed nations. A rising live expectancy and growing wealth combined with climbing company profits will enhance the appetite for stocks even with the retired, who can calculate with a remaining lifespan of 20 years and more.

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