Secular Outlook 2013 builds on earlier research – We Need a Bigger Boat: Sustainability in Investment – in which Towers Watson identified six “mega- trends” likely to influence economies and markets during the next ten years, and beyond: economic imbalances, adverse demography, degradation of natural capital, innovation and technology, business connections and government.
These factors will have a range of effects over the long-term, the firm claims. Outcomes include below-trend growth in the developed world – owing to weak demographics, deleveraging and the resolution of “inter-generational inequity” – and a volatile socio-economic environment, resulting from increased competition for resources and rising inequality between countries.
‘Powerful tool’ for long-term investors
“We believe that a robust understanding of secular growth dynamics is critical to any long-term investor as the process of building those forecasts and understanding the variability around them is a powerful tool in understanding plausible paths for global growth,” wrote Tim Hodgson, head of the thinking ahead group at Towers Watson.
“We also think that mega trends and their impact should play a greater role in portfolio construction to exploit thematic ‘winners’ or ‘losers’; but how to achieve this in practice is a real challenge.”
To assess the impact of such trends on future long-term growth, Towers Watson constructed the SGI. The index adjusts the estimated baseline forecast for 25 countries, according to a qualitative assessment of how the themes will influence the economic prospects of each nation.
Below-baseline forecast for China
For the US, the SGI predicts above-baseline real GDP growth of 1.9%-2.5% each year between 2012 and 2022, thanks to positive demographic, resource scarcity and new technology effects. In contrast, the index forecasts below-baseline expansions of 7.0%-8.5% for China, with demographics, rebalancing and resource scarcity all weighing on the country’s economy.
A copy of Secular Outlook 2013 can be downloaded from the Towers Watson website, here.