The “global savings glut” has stopped growing and will begin to shrink in just a few years in a possible game-changer for markets, according to an analysis by Gavekal Research Ltd.
The glut—perhaps the most famous theory behind the three-decade slump in bond yields—was propelled by demographic patterns in the world’s biggest developed economies which saw a surge in the number of people aged 35 to 64, which tend to be high saving years, wrote Will Denyer, an economist at the Hong Kong-based Gavekal, wrote in a report this month. As those demographic patterns reverse, the implication will potentially see “big rate rises” and the risk of a “major fall” in global equity valuations, according to Denyer.
According to the report, calculating the outlook for the “capital provider ratio’—which measures the number of 35 to 64 year olds divided by the number of people outside of that age bracket—indicates the world’s saving propensity will drop in a decade’s time. The study also showed that in a more refined measure that looks at weights for narrower cohorts of people—just five years—saving propensity will fall rapidly after 2020.
Benchmark 10-year U.S. Treasury yields have averaged 3.74% in the last two decades, compared with the 8.97% of the previous 20-year period. Tuesday, they were at just 2.33% in New York trading.
“In the next few years, demographics will be neutral for interest rates and asset prices,” Denyer wrote in the report. “Hence a balanced portfolio should still do well. But managers should reduce the duration of bond holdings, to avoid risk from rising rates in the 2020s.”
He also wrote that their analysis suggests a shift from the balanced portfolios of equities and the longer-dated bonds that have done well since 1982. He also noted that, back in the 1970s, when inflation-adjusted interest rates were high, three-month Treasury bills “consistently outperformed both equities and bonds.”
“Demographics did indeed provide substantial support for higher equity valuations from 1980 until today,” Denyer wrote in the report. However, the sharp decline in the refined capital provider ratio after 2020 “means that equity valuations could sustain their present levels for a few more years, but then risk a major fall.”