European investors continue to pour money into their equity markets. Although the pace has clearly s...
European investors continue to pour money into their equity markets. Although the pace has clearly slowed since the massive influx seen earlier this year, in the past few months retail equity inflows have been running at an annualised rate of $157bn.
These same investors are selling their bond funds, a trend that began in mid 1999, and reflects the growing equity culture among Europeans.
While American, British and Swedish investors have long held a high proportion of their mutual fund assets in equities, a big change is going on in the rest of Europe. The latest figures show that in Italy equities now account for 38% of mutual fund assets compared to only 20% a year ago, while in France, this has risen from 24% to 35% over the same period. Spain has the fastest growth in equity mutual fund assets.
The UK's mutual fund market is less important because its equity culture is already well and truly alive. The underlying growth rate of all European assets (excluding asset appreciation) is about 9%pa within which equity asset growth is nearer 23%. We believe this huge shift towards equities in Europe in the past year shows no signs of abating.
One of the main reasons for these equity inflows is demographic changes which are having a dramatic effect on social expenditure levels in all the major OECD countries, with sharp increases in expenditure on public pensions and health care systems. While pensions are only one facet of this increase, they are likely to have a significant impact on the level of equity investment. This is because a sharp decline in the future working population in all OECD countries, together with an increase in the number of older people, will drive up the cost of public pensions substantially.
Pension costs expressed in terms of the working population are expected to increase several times. Today, for every pensioner in Europe there are on average 3.5 workers that contribute to his retirement income. This ratio is expected to grow to 2.5 workers for every pensioner by the year 2020.
Other factors are the baby boom of the 60's and the sharp decline in birth rates in all European countries since then, as well as a much higher life expectancy for men and women.
The combination of these problems is now putting extreme pressure on many of those public pension systems that are not fully funded.
While major reforms to the pension system are necessary, it is clear that one of the most probable solutions to this funding crisis is to encourage further private savings by individuals as a means of funding their own retirement. With private pension funds beginning to account for a higher proportion of household assets, we believe demand for equities will continue.
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