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Turn for the verse

A little while back it was Spandau Ballet, then Virgil and now we can add Philip Larkin to our ever growing list of unexpected investment commentators. I’m not 100 per cent certain the poet’s oft quoted This be the verse – the one about what your mum and dad do to you, intentionally or otherwise – was necessarily meant as a critique of the effects of the baby boomer generation but it’s not too far off the mark.

Certainly it chimes with the conclusions of the first chapter of Barclays Capital’s recently published Equity Gilt Study 2010 – although, of course, the poem uses somewhat bluer language than one has come to expect from Tim Bond, the investment bank’s head of asset allocation.

And yes, I’m well aware Bond’s views were examined last week by my neighbour across the page but then that is why I avoided the subject. You see, it was only sheer selflessness on my part that had me plugging some
roadshow – the name of which temporarily escapes me -and shame on any of you who thought otherwise.

I should imagine the boom – ers are growing accustomed to having the blame for most of the world’s ills laid at their door so they must have known it was only a matter of time before they took the rap for every financial crisis in modern times. “You can tell the story of the last 20 years or so in terms of demo graphics,” notes Bond. “All recent crises have a single und erlying factor – a surplus of savings.”

Not that the baby boomers can win either way because, now they are retiring, we are heading from a time when too much capital made for bad
investment decisions to one when not enough capital means we will be harking back to the good old days when we had investment decisions to make.

“The ageing of the developed world’s boomer generation into retirement will reduce net savings balances in these economies,” says Bond. “The slightly later ageing trends in some of the large developing economies, such as Brazil and China, point in a similar direction. The upshot is that an era of capital abundance that has generated increasingly frequent financial crises is drawing to a close.”

In what turns out not to be a lone instance of “I have good news and I have bad news,” Bond continues: “On this score, we might expect a decreased frequency of bubbles and busts in the years ahead. Unfortunately, a decreasing savings abundance also generates a less favourable
environment for financial assets valuations.”

According to Bond, the increased frequency of bubbles and busts over the past two decades was symptomatic of an excess of global savings
over viable investment opportunities and the net result of this era of capital abundance was a series of severe capital misallocations – Larkin might have plumped for a less polite description – the roots of which lie in the demographic profile of developed economies and the rising prosperity of the major developing nations.

“Demographic projections suggest the ageing profiles of both the developed and some key developing economies will result in decreasing savings flows and vastly increased government borrowing in the decades ahead,” Bond continues.

“The era of capital abundance might very well give way to an era of capital scarcity. Certainly, asset valuations are likely to display a downward trend in the decade ahead. That said, our analysis suggests that equities are still capable of generating a reas onably positive return over the next 10 years, despite a tend ency to de-rate. On the other hand, long-term government bonds do not appear to offer attractive prospects.”

There we go again with that good news, bad news” approach. In fact, at the launch of the 2010 study, Bond was even blunter, suggesting that
returns from neither bonds nor equities would be particularly attractive over the next decade but that, while returns on equities would be lower than average, returns on bonds would be “disastrous”.

“Man hands on misery to man,” Larkin concluded. “It deepens like a coastal shelf. Get out as early as you can – and don’t have any kids yourself.” Once again, he had it about right socio-economically – although he might have changed his mind had he lived long enough to need a pension.

Julian Marr is editorial director of


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