Feeling the squeeze: is it crunch time for Generation X?

In some ways Generation X is caught between a rock and a hard place, facing a squeeze from a range of shifting social and demographic factors and financial pressures. From a financial perspective, rising longevity is just one factor, with improvements in technology, science and health provision meaning people are living longer and requiring more and more capital. More specifically, the issue of wealth transfer from the Baby Boomer generation is also becoming increasingly important. In future, Baby Boomers who are already pondering whether to transfer assets to their own children or the next generation of Millennial grandchildren could well opt to do the latter.

Against this backdrop, those in generation X will increasingly need to work out what their long-term financial and retirement requirements are and identify solutions to support this while protecting their existing capital. But, while these people need to be invested to grow their wealth and grow their income in the longer term, their investment choices may not be easy. Annuity rates have fallen in recent years and mainstream investment markets have also seen equity prices become extended over time and returns from bonds become low by historic standards. With other pressures such as inflation looming, a range of other more sustainable and long-term alternative investment options may increasingly come into focus.

Freeman Le Page – investment specialist and SRI client director and Nick Moss, portfolio manager multi-asset team. Newton, a BNY Mellon company

In some ways Generation X is caught between a rock and a hard place, facing a squeeze from a range of shifting social and demographic factors and financial pressures. From a financial perspective, rising longevity is just one factor, with improvements in technology, science and health provision meaning people are living longer and requiring more and more capital. More specifically, … read more

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Millennials: we’ve never had it so tough

For millennials* the financial headwinds are legion. Previous generations grew up with the understanding that they should never need to spend more than a third of their income on rent or housing costs. Now consider the case for millennials who are looking at having to allocate some 45% of their income just to keep a roof over their heads. A second punch to the gut is student debt. Right now there’s some US$1.5 trillion in student debt outstanding and the average student loan per capita for a millennial is just over US$37,000 dollars.

Against this background, US home prices have increased 29% since 2000 but millennials’ real median income has only gone up by 1%.

With a triple whammy of higher housing costs, rising debt and lower wages we think it’s no exaggeration to say millennials have it hard.

Chris Kelly – head of Commercial Real Estate. Amherst, a BNY Mellon company

*Defined as individuals born between 1982 and 2000.

For millennials* the financial headwinds are legion. Previous generations grew up with the understanding that they should never need to spend more than a third of their income on rent or housing costs. Now consider the case for millennials who are looking at having to allocate some 45% of their income just to keep a roof over their heads. A … read more

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MarketEye: Why Trump’s popularity is up c.5% since start of the year

Defined as an ideological movement that says citizens are being disadvantaged and mistreated by a small group of privileged elite, it is easy to see why populism has been on the rise.

In the US, real wages for middle- and low-wage earners have been stagnant for more than a decade, yet the top 5% of earners have experienced a significant increase over the same period. If you see a neighbour that is doing really well and you feel you are struggling then that is when people tend to get dissatisfied.

This period has also coincided with the post-financial crisis recession and the slowest recovery from a recession in close to 100 years. Populism was seen as one of the key drivers behind the election of President Donald Trump in November 2016, but it is not solely the US that has seen it rise. Changes in the type of manifesto individuals are elected on can bring changes in policy, which in turn has an impact on stock markets.

Now we have a ‘populist’ president and he has different policies and methods of communicating with the electorate. He is seen as controversial, but despite his style and approach, he has been successful in terms of getting some of his key policies enacted. Apart from Obamacare reform, he has succeeded in lowering the corporate tax rate, allowing US companies to repatriate earnings at a low tax rate, and commencing regulatory reform.

We view the majority of his headline policies as pro-growth and pro-business and therefore see opportunities in the US equity market.

Chuck Cook – portfolio strategist. BNY Mellon Asset Management North America 

Defined as an ideological movement that says citizens are being disadvantaged and mistreated by a small group of privileged elite, it is easy to see why populism has been on the rise. In the US, real wages for middle- and low-wage earners have been stagnant for more than a decade, yet the top 5% of earners have experienced a significant … read more

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The US$3.8trillion bond sector you might not even know about

This past year, 2017 leading into 2018, the US saw a lot of significant weather events and climate disasters. It saw three hurricanes: Harvey in Texas, Irma hit Florida and Hurricane Maria in Puerto Rico. The combined damage of those three hurricanes was around US$203bn. That has an impact on the economies of those states, the infrastructure of those communities and their tax and revenue bases.

The US also saw tornados, flooding, and on the east coast, serious winter storms. Forgotten vocabulary is coming back into the lexicon, like ‘bombogenesis’, which means bomb cyclone. The east coast of the US was hit with two of those in 2017/18 – the last time it had storms of that sort was several decades ago.

The states suffering from such climate crises really know the impact of climate change and what it can do to their communities. So in response to the Trump administration’s withdrawal from the Paris Accord, several states started the Climate Alliance. California, Washington and New York kicked it off, then were joined by 13 others (plus Puerto Rico). Their goal is to meet the Paris Accord targets – to decrease emissions by 26% to 28% from a 2015 base line by 2025.

The GDP of these states makes them comparable to many sovereign economies – California has a GDP approximately the size of France and New York is equivalent to Canada. They also have their own constitutions, law-making abilities and taxes. To fund infrastructure projects, which include climate change initiatives, they issue bonds.

These so-called municipal bonds are a diverse set and have already funded a huge amount of US infrastructure maintenance and renewal. At US$3.8 trillion, the municipal bond market is almost half the size of the US corporate bond market and we don’t see it getting smaller, particularly as the challenges of managing climate change continue or, potentially, intensify.

Dan Rabasco – Chief Investment Officer for Tax Sensitive Fixed Income. BNY Mellon Asset Management North America 

This past year, 2017 leading into 2018, the US saw a lot of significant weather events and climate disasters. It saw three hurricanes: Harvey in Texas, Irma hit Florida and Hurricane Maria in Puerto Rico. The combined damage of those three hurricanes was around US$203bn. That has an impact on the economies of those states, the infrastructure of those communities … read more

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Tobacco: a slow-burn success story?

For all the challenges the industry has faced tobacco has remained attractive for investors. Now, in the face of ongoing litigation, a crack-down on advertising, smoking bans, and even plain packaging, the industry is reinventing itself through new heat-not burn and vaping products.

We continue to believe these could create an inflection point for the industry, offering a route out for smokers looking to quit harmful combustible cigarettes but also allowing tobacco companies to build new revenues with products that are less detrimental to health.

Should they succeed we see tobacco producers continuing at the apex of a market where competition is limited and where profitability consequently remains extremely robust. In our bull-case scenario, smokers will consider the risk/reward dynamics of their habit and decide to migrate en masse to next-generation products. The significantly reduced harm of these new products keeps them in the category – meaning the combined volumes of combustibles and next-generation products stabilise or even rise.

Amy Chamberlain – global analyst. Newton, a BNY Mellon company

For all the challenges the industry has faced tobacco has remained attractive for investors. Now, in the face of ongoing litigation, a crack-down on advertising, smoking bans, and even plain packaging, the industry is reinventing itself through new heat-not burn and vaping products. We continue to believe these could create an inflection point for the industry, offering a route out … read more

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Dispelling the myth: Volatility can be positive for returns

In 2017, the global economy transitioned from a period of sluggish, US-dominated growth, to a more synchronised global recovery. With inflation still well behaved, corporate earnings grew strongly, buoying both equity and credit markets and suppressing volatility, which reached historically low levels.  So far, 2018 has proved more challenging for some investors. Volatility spiked in the first quarter, driven by the unwinding of US volatility products and then compounded by an increase in global trade tensions and profit taking in US technology stocks. Unanticipated volatility spikes generally hurt in the near term, but they can also offer opportunities. Although generally short lived, the fear of loss among investors drives risk appetite downwards, and derivatives markets become dominated by those looking to hedge against downside risk. As a result, risk premia in option pricing can become elevated and this can create greater opportunity for alternative, option-based strategies to deliver positive returns.

Steve Waddington – portfolio manager. Insight Investment, a BNY Mellon company

 

In 2017, the global economy transitioned from a period of sluggish, US-dominated growth, to a more synchronised global recovery. With inflation still well behaved, corporate earnings grew strongly, buoying both equity and credit markets and suppressing volatility, which reached historically low levels.  So far, 2018 has proved more challenging for some investors. Volatility spiked in the first quarter, driven by … read more

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Weaning China off credit addiction

The Chinese authorities are galvanised to lower the dependence on credit of its economic model so that less credit is needed to generate an increment of GDP growth. Notwithstanding recent efforts to infuse more durable liquidity in to the banking system, going forward, heightened financial oversight of the on- and off-balance sheet usage of credit and further state owned enterprise restructuring will be the norm. This is already achieving some headway. The share of bank deposits as a percentage of Chinese GDP and that of aggregate total social finance (a proxy for on- as well as off-balance sheet lending) have already begun to decline. This development highlights the effectiveness of financial tightening as well as the regulatory crackdown on shadow banking.

Aninda Mitra – Senior Sovereign Analyst. BNY Mellon Asset Management North America

The Chinese authorities are galvanised to lower the dependence on credit of its economic model so that less credit is needed to generate an increment of GDP growth. Notwithstanding recent efforts to infuse more durable liquidity in to the banking system, going forward, heightened financial oversight of the on- and off-balance sheet usage of credit and further state owned enterprise … read more

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Horror on the high street: ‘Experiences over things’ revs up retail apocalypse

Increasingly we are seeing a trend towards consumers valuing ‘experiences over things’ and this is having an impact on the performance of certain sectors. There have been a string of high street casualties in recent weeks, with a number of household names falling into administration. Other brands have been forced to seek help through Company Voluntary Agreements – arrangements with their creditors usually to try and improve lease terms on stores.

Restaurants are not immune to the squeeze in consumer discretionary spending, so while the growth in the sector may seem counterintuitive compared with headlines seen in recent months, it is in particular mid-market chains that are shrinking. We see greater consumer appetite for healthier eating, informal and experiential dining and an increased focus on food provenance and sustainability.

These trends are not unique to the UK, in the US footwear and apparel sales are also lagging other sectors. We believe these trends will materialise at different paces in different countries but for now the ‘experiences over things’ idea remains very much a developed market phenomenon.

Anna Martinez – fixed income analyst. Newton, a BNY Mellon company

Increasingly we are seeing a trend towards consumers valuing ‘experiences over things’ and this is having an impact on the performance of certain sectors. There have been a string of high street casualties in recent weeks, with a number of household names falling into administration. Other brands have been forced to seek help through Company Voluntary Agreements – arrangements with … read more

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The revolution set to save industries $421bn per year

Industry 4.0 – our name for the fourth Industrial Revolution – uses smart technology to enhance manufacturing processes, making them more efficient and more easily adaptable to customer needs. It promises the integration of automation, data, analytics and manufacturing to deliver new business and operating models. Computers and robotics will come together in an entirely new way in ‘smart factories’. Robots will be connected remotely to digital systems equipped with machine learning algorithms. These systems will analyse information coming from the shop floor and control the production line, making decisions with minimal input from human beings.

Future production lines will employ a fraction of the people currently needed, so the impetus for production to happen in low-wage locations may become less important. There may also be a greater need for software engineers who can monitor increasingly complex systems on-site and less need for manual labour.

For these reasons, Industry 4.0 could mean greater investment in production within Europe and the US. As a consequence, the production shift in the late 20th and early 21st centuries to low-wage economies, such as Mexico and Bangladesh, may be reversed. Inevitably, a revolution on this scale will likely shift economic distribution, both from country to country as well as from labour to capital. This could be the most material long-term consequence of Industry 4.0.

Walter Scott Global Equities team

Industry 4.0 – our name for the fourth Industrial Revolution – uses smart technology to enhance manufacturing processes, making them more efficient and more easily adaptable to customer needs. It promises the integration of automation, data, analytics and manufacturing to deliver new business and operating models. Computers and robotics will come together in an entirely new way in ‘smart factories’. … read more

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The risk business: towards a new paradigm?

Geopolitical analysis is an essential piece of investment management that many firms currently neglect. We think markets are not fairly pricing the level of current and potential global geopolitical risk due to distortions such as central bank liquidity. Another explanation for the recent complacency toward geopolitical risk is the rise of exchange-traded funds (ETFs), which has distorted capital flows into equities. However, recent price action of political risk-off assets including gold, the Swiss franc, the Japanese yen and the “Defence” Index (Dow Jones US Select Aerospace & Defence Index) is becoming more acute in response to the most recent geopolitical events. In short, geopolitical risk is starting to get noticed, and we believe active equity asset managers are well positioned to capture the benefits and avoid the pitfalls.

Jim Lydotes – portfolio manager and Richard Bullock – senior analyst. BNY Mellon Asset Management North America

Geopolitical analysis is an essential piece of investment management that many firms currently neglect. We think markets are not fairly pricing the level of current and potential global geopolitical risk due to distortions such as central bank liquidity. Another explanation for the recent complacency toward geopolitical risk is the rise of exchange-traded funds (ETFs), which has distorted capital flows into … read more

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