“Please mind the generation gap”

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A better understanding of generations’ financial behaviour, their needs and wants, and their impact on the economy should allow investors to benefit from investment opportunities and enable asset managers to create value, while at the same time helping financial markets to overcome a ‘demographic dip’ resulting from the generation gap between baby-boomers and millennials.

Most of us follow the same life cycle. We start out as children, then we become young single adults. We pass from student to working life, form couples, become parents, grands-parents and then retirees. At each of these stages, our financial behaviour evolves and adjusts to our needs of the moment. And when a large group of individuals undergoes these same shifts at the same time, the economy is affected. This is the case of certain generations that have brought about major changes in the global economy.

Defining the notion of ‘generation’

Generally speaking, a generation is a sub-population whose members are more or less the same age or who have lived at the same time, and who thereby have had many common experiences. However, some experts** take another approach to this and extend the baby-boom generation to persons born in the US between 1935 and 1961, as seen in the graph below from trough to peak.

The baby-boom generation of 105 million individuals (not counting immigrants) according to the Census Bureau had a major impact on the US, which was unable to adjust supply to demand. For example, the job market was sluggish, with the unemployment rate rising from 3.50% at end-1969 to 8.2% at end-1975. Likewise, the real estate market boomed until the 2000s, driven by all of those baby-boomers simultaneously buying property .

Exhibit 1: The evolution of US births in millions

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Source: US Census Bureau (millions of births)

The mid-life spending peak

American families’ expenditures peak when the parents are on average 46 years old. In general, couples have their first child between 28 and 33. When this child goes to university at age 18, parents’ expenses often spike, with tuition, room, board and related expenses. The impact of baby-boomers’ heavier spending can be seen in various economic indicators. The graph below highlights a close correlation between US equity market capitalisation (adjusted for the expansion in the Fed’s balance sheet) and baby-boomers that are 46 years old.

Exhibit 2: This graph shows how US births shifted and US market capitalisation occurred

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Source: US Census Bureau (millions of births), Bloomberg

While demographics clearly affect the economy, there are other major factors such as legislation, government policy, monetary policy, wars and geographical tensions.

Next generation millennials: social media savvy, but burdened by debt 

Based on the same broad definition of a generation, millennials are individuals born in the US between 1976 and 2010 – a period of 34 years. This generation of 136 million individuals (excluding immigrants) is actually larger than the baby-boom generation. This is also the first ‘digital’ generation, i.e., born as the internet came of age. They trust social media (e.g., Facebook, Twitter, Instagram, etc.) more than they do companies. Their lives, in fact, revolve around social media.

However, millennials’ impact on the economy is different from that of the baby-boomers. For one, they are a smaller portion of the population. While baby-boomers accounted for up to 57% of the US population (in 1960), millennials made up only 43% in 2014. In addition, they were born over a longer period than the baby-boomers were.

Millennials born before the first peak of births in 1990 have now completed their studies and started working. They are numerous enough to affect the economy, but conditions have not been in their favour. They arrived on the job market carrying debt in the middle of the subprime crisis in 2008. The US economy was resilient enough for them to find jobs, but those jobs were less well-paid and this delayed their financial autonomy. In 2015, for the first time since 1960, 31.6%* of people aged 18 to 34 still lived with their parents (see chart to below).

Exhibit 3: The number of young adults (18-34 years of age) living with their parents

Graph GG HH

Source: US Census Bureau, Annual Social and Economic Supplements

Grasping generations’ financial behaviours means seeing the opportunities

The behaviour of baby-boomers and millennials is having a clear impact on the economy. Nevertheless, financial markets are currently trading in a ‘demographic dip’ between the baby-boomers, who are reducing their expenditure, and the millennials, who are not numerous enough to have reached their prime spending years.

A better understanding of the behaviour of each of these generations should allow asset managers to create value, for example, by focusing on healthcare and pharmaceuticals as US baby-boomers grow older. They could also try to identify new countries that have the same features as the US at the start of the 1960s, i.e., those undergoing urbanisation and lightly indebted countries with economic growth similar to what the baby-boomers experienced and a population consisting of a high proportion of young, skilled workers who have put some money aside. [divider] [/divider]

This article is written by Fabien Benchetrit, Senior Portfolio Manager, on 21 July 2016 in Paris

Fabien Benchetrit

Senior Portfolio Manager, Model-driven Cross Asset, THEAM

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