4.4 Decline in demand for equities 2
We now explore possible change in equity demand which may have changed since the McKinsey Report was written.
Activity 7 Recent developments in global equity demand
Do you think the arguments outlined in Activity 6 above have changed with respect to decline in demand for equities (made by McKinsey in 2011) since the paper was written?
Answer
1. As bond yields have fallen, investors may shift into equities.
2 & 3. The new rules on pensions in the UK are encouraging people to remain partially invested even after retirement. Also DC pensions can be invested in lifestyle funds which typically have a high equity content until 10 years before retirement. And the retirement age is increasing over time. 4. Equity returns have been relatively good since 2011. Also, Government bond yields are at record lows as a result of quantitative easing. Currently, around 40% of Eurozone bond yields are negative. The central banks are encouraging investors to buy riskier assets – so-called financial repression.
5. Given perverse incentives for institutions such as pension funds and insurance companies (e.g. the more bond yields fall, regulations require them to buy more bonds to meet their liabilities), there is likely to be a loosening of regulations which will allow these institutions to buy more equities.
What is the key behavioural bias that this highlights?
Answer
Individuals saving for retirement with DC pension funds invest less in equities (are more risk averse) than investment intermediaries when investing on individuals’ behalf in DB schemes. The attitude to risk is different even though the investment objective – a good pension – is the same.