4.3 Decline in demand for equities 1
The next activity explores why demand for equities worldwide has changed over time.
Activity 6 Global equity demand
Timing: Allow around 30 minutes for the reading and activity below.
a.
Increased wealth in emerging economies
b.
The aging population of developed economies
c.
Developed economics are switching from defined benefits to defined contribution schemes
d.
Higher income tax rates on dividends
e.
Increased regulation on insurance companies
f.
The 2008 crash made investors wary of equities which was riskier than bonds
g.
Basel 2 and 3 regulations penalises financial institutions for holding equities
h.
Reduced wealth in emerging economies
i.
The 1929 Wall Street Crash
The correct answers are a, b, c, f and g.
Answer
These are:
- Increased wealth in emerging economies where tradition favours bank deposits or bonds.
- The aging of the populations of developed economies: older people tend to hold more bonds and less equities than younger people in their portfolios.
- Developed countries are switching from defined benefit (DB) pension schemes to defined contribution (DC) schemes which has the effect of moving market risk from the employer to the employee. Individuals with DC schemes are more risk averse than investing institutions investing on their behalf in DB schemes and so hold a higher percentage of bonds in their pension plans.
- The crash of 2008 made investors wary of equities which are risker than bonds, especially given the good performance of bonds over the recent past.
- Regulations such as Basel 2 and 3 penalises financial institutions such as banks from holding equities.