According to their report, which was prepared in cooperation with the international Institute of McKinsey, as well as with their expert group, "golden era" of investments and capital will soon be over. Calculations show us that the profitability of investments in next 20 years, including dividends and securities, in the future will significantly fall against the backdrop of values of the last 30 years. For many large investors, it would be shocking news. Because many of them born and grew up in the "golden era". And long period of low returns will force them to take unpleasant decisions, which are not identical with their usual lifestyle.
Analysts which were involved in research, examined the overall profitability of many kinds of investments in the US and Europe. It was discovered that dawn of investments occurred in the period of last three decades. Real profitability of investments into US stocks and Western Europe is 7.9% per annum on average. Bonds in the US - 5% per year in Europe - 5.9% per year. If you take time interval of 100 years, the real return on investments in stocks in the United States will be 6.5%, in Europe - 4.9%. Investments in bonds "earned" for the American and European investors for the last hundred years 1.7%.
Current situation is really exceptional, say experts. Investors has been receiving huge profits due to "particularly favorable aggregates of many economic and business factors", which no longer exist today. What are these factors? The first is low inflation rate and interest rates. Then, increase of labor productivity by using new technology. And finally, a powerful appearance on the international arena of China with its volumes of demand.
However, everything comes to an end sooner or later. During the next 10 years inflation and rates will be increased. Growth of Chinese economy is already decreasing, and most of the new technologies have been introduced earlier. At McKinsey believes that there are two scenarios. First variant: slow growth, the profitability of stocks in the US market will be at level of 4-5%, the bonds - 1%, for the next 20 years. The second variant: high rates of growth, but not like in previous 30 years. Scenario for Europe is the same.
Many large investors in market are ending their professional activity. Throughout their career they saved and invested in period of high yields. Thus, they have become accustomed to think that future earnings will remain at previous level. But now they will be forced either to make more money or to retire later. American families which have been doing a lot of investments in stocks in 2014 had $18.4 trillion in stocks and $6.8 trillion in long-term bonds. If the yield will be reduced to 4.5% y/y, according to McKinsey's expectations, the investor will be forced to work by 7 years longer or save money in 2 times more.
Both private and public funds are heavily dependent on fixed income instruments. Insurance companies invest more than 60% of their assets in such securities. Therefore, public pension funds, in case of reducing the profitability of stocks and bonds, can start to work with the more profitable investments. But for insurance companies the increase rates is a positive thing.
End of the "golden era" will play into hands of emerging markets, including some CIS countries. Because investors will look for riskier and higher-yielding assets. First of all, right to a tee, this is the emerging markets. Therefore, the last ones have to prepare the most comfortable conditions for investors for future investments. The most attractive countries for investors will be the ones that introduce new technologies and thereby increase their profitability.