“A Transforming World” Identifies Trends Driving Economic Change in the Coming Years
A resurgence of American innovation, a slow yet steady shift into equities and away from bonds, and rising levels of wealth in emerging markets are reshaping the United States, world economies and financial markets, according to “A Transforming World,” a report and webcast from top thought-leaders in BofA Merrill Lynch Global Research, Merrill Lynch Wealth Management, and U.S. Trust. Among the developments that are altering how, when and where individuals and institutions invest:
- New oil and gas extractive technologies are rapidly moving the U.S. towards energy independence, potentially lowering costs for consumers and increasing the competitiveness of U.S. businesses.
- The U.S. economy is seeing the initial fruits of technology advances that have long been in development including 3-D printing, factory robotics, Big Data, personalized medicine and others.
- The engine of global growth is shifting from the U.S. consumer to the newly affluent middle classes in China and other emerging markets, doubling the number of middle-class households globally in coming years.
- Flows from fixed income into equities signal that stocks have begun a shift towards a new, secular bull market that we believe could last for a decade or more.
“This analysis reflects the insights we gain through the power of our global connections,” said Bank of America Chief Executive Officer Brian Moynihan. "It is clear from the way that financial markets and economies are linked that investors have to consider both opportunities and risks. In this report, our experts help sort through those.”
“A Transforming World” identifies three themes underlying the changes underway: a resurgence of business and technology innovation in the U.S. that has the potential to revitalize the economy; shifts in the financial markets away from fixed income and towards equities; and a rebalancing of the world’s economic, political and social power towards emerging markets.
A revival of U.S. innovation
Optimism has come into vogue about the United States’ long-range prospects. This confidence is driven by changes in business and technology, including energy, labor market shifts and technology innovation:
- U.S. citizens and corporations still receive more patents than those of any other country in the world, and the U.S. invests more in R&D than China, Japan, South Korea and Taiwan combined, generating technologies such as digitalization, cloud computing, custom manufacturing and quick time-to-market design.
- After nearly 70 years of growing dependence on imported energy, new technologies that enable oil and gas to be extracted from shale rock have enabled the U.S. to move from being the world’s largest importer of petroleum products to the second-largest exporter in just five years.
- Labor costs have dropped during the recession and the ensuing sluggish recovery, enabling companies to increase profitability. American manufacturers, in particular, have once again become competitive globally.
“In a transforming world, the growth backdrop is changing,” said Candace Browning, head of BofA Merrill Lynch Global Research. “For decades, the U.S. consumer drove global growth, and the U.S. imported both raw materials and finished goods. Now, the new middle classes in emerging markets are stepping up, and the U.S. soon will become a net exporter of energy even as a revival of manufacturing gets underway. It’s an upside-down world, with imbalances everywhere and that translates into opportunity for the global investor.”
Shifts in the financial markets
Risk-aversion has kept investors overweight in cash and conservative, bond-heavy allocations since the financial crisis. However, low inflation and low interest rates are fueling a surge toward equities as investors seek yield:
- Between November 2012 and mid-March of this year, $30 billion more flowed into than out of stock funds.
- Despite the flows and stock market highs, opportunities remain. Equities are still valued at a discount because, even as stocks are rising, so are earnings expectations. As a result, the price/earnings ratio is 14.5 times projected 2013 earnings, below the 15.5-16 times earnings deemed fair value.
“What we’re seeing in the financial markets is a return to normal as investors shift from the defensive, post-traumatic stress environment that characterized the markets after the financial crisis,” said Merrill Lynch Chief Investment Officer of Portfolio Strategy Mary Ann Bartels. “Today, investors increasingly are seeking growth, and that’s reflected in the flows back into the equity markets. In a sense, the ‘new normal’ is really the ‘old normal.’”
A global rebalancing
Some of the most profound transformations involve demographics and shifting alignments of global power and wealth, driven to a large degree by economic growth in emerging markets.
- By 2030, the number of people worldwide defined as middle class will likely double to 2 billion, with most of the growth coming in today’s emerging markets.
- As the world’s middle classes expand and grow richer, consumer consumption will rise. This shift will place unprecedented strains on the planet’s resources, with implications that only now are becoming clear; for instance, the growing appetite for meat in emerging markets will increase demand for water, since meat requires 10 times as much water to produce as wheat.
“In this transforming world, the U.S. consumer will no longer be the chief driver of economic growth,” said Merrill Lynch Private Banking and Investment Group Chief Investment Officer Chris Wolfe. “Growth opportunities are likely to be more global. The economic activity generated by emerging markets won’t be confined within their borders; consumers in China, Russia and elsewhere already are buying property, goods and services in North America and Europe, generating growth. Smart investors will look to see who benefits from growth, not just where it occurs.”
“The themes of a revival of U.S. innovation, shifts in the financial markets and global realignment all have different implications, so no single investing strategy can enable investors to maximize opportunities,” said U.S. Trust Chief Investment Officer Chris Hyzy. “However, investors have a greater range of choices than ever before for addressing investment themes and ideas. They need to consider a wide range of asset classes, develop a global perspective and rebalance more frequently to stay ahead of the curve.”