The possibility of the world entering a ‘de-cumulating’ phase due to babyboomer retirements, is unlikely to have much of a subsequent downward pressure on asset prices, according to Tony Cole, the business leader for Mercer Investment Consulting, Asia Pacific.

In a briefing note in the latest Mercer client letter, Cole says the decline in asset prices due to a critical mass of babyboomers retiring is likely to be small and is difficult to identify against the background of movements caused by other economic factors. Cole admits, however, that the so-called ‘savings glut’ which is occurring as the babyboomers come close to retiring, seems to be keeping bond yields below expected levels. This also impacts on the pricing of bond substitutes, such as property and late-stage infrastructure. “We expect that some current account surplus countries will not continue to run such large surpluses in the medium term and we see signs that others will diversify their investments away from bonds,” Cole says. “As this occurs, bond pricing is likely to return to more normal levels and reduce pressure on asset prices in general.” Cole says the idea of an asset-price meltdown may sound plausible because it is based on the life-cycle hypothesis and can be accepted as commonsense. “But it strains that commonsense base beyond breaking point,” he says. In his client letter, Cole refers to a new book by professor Jeremy Siegel, which predicts that babyboomers across the developed world could see the value of their assets plunge by up to 50 per cent in an “asset price meltdown”. The life-cycle hypothesis would suggest that countries with a bulge of population in the prime saving age group, just before retirement, would have high household savings ratios and would tend to export capital to younger countries. However this is not the case. Cole says many of the countries with large babyboom generations just ending their working careers have both low savings ratios and current account deficits.

Leave a comment