All investment strategies have the potential for profit and loss, capital is at risk. Past performance is not a guide to future returns.
The world is saving too much, driven by the following powerful, deep-rooted overlapping forces:
- demographic change
- inequality
- government policy.
Excess saving has probably contributed to driving down global interest rates and pushing up asset valuations in recent years. We expect the savings surplus to increase substantially in coming years, meaning that the days of low interest rates will once again return.
What is the savings surplus, and what are its effects?
By a surplus, we mean that the desire to accumulate financial assets is greater than the willingness of companies to use financial assets to fund productive investment.
Virtually all developed countries have seen a substantial increase in household savings stock relative to Gross Domestic Product (GDP) in recent decades – the chart below shows this in the case of the G7 nations. Net wealth measures the supply of household assets (housing, cash, loans and financial assets, such as equities and bonds) less the debt used to finance those assets.
Household net wealth to GDP
But while household wealth is rising relative to GDP, productive capex – the money being spent on assets to promote growth in the economy and businesses – is not.
Private non-residential fixed investment in the developed world, which covers purchases of non-residential structures, equipment and software, has been falling as a share of GDP when wealth has been growing.
Morkunaite and Huefner (2014) show that indeed, far from issuing more financial assets to absorb savings, companies have also become net savers.
Why is there a savings surplus?
Several factors underpin this rise in savings. One is rising asset valuations, which have led to greater wealth accumulation among those with high starting wealth. But (as we show later) savings would have accumulated significantly in recent decades even without any change in valuations.
Another is inequality. In many countries, particularly the US, the rewards of economic growth – in the form of higher incomes – have disproportionately accrued to a tiny segment of the population, who consequently have a high propensity to save. But this explanation applies less well in some regions, such as parts of Europe, which have seen a less pronounced rise in inequality but have still experienced sharply rising savings.
So these are at best only partial explanations. In fact, we believe that the most significant influence is demographic change, particularly the impact of declining populations and longer life expectancy. Shrinking populations mean each successive generation is smaller, allowing more wealth accumulation by families with fewer children to support. Longer life expectancy means more time in retirement, which increases the need to save.
What does this mean for interest rates and asset prices?
Economic theory suggests that prevailing interest rates are a function of the balance between the demand for savings for use in investment and the supply of those savings. As excess savings accumulate, they push down on interest rates. Lower interest rates drive up valuations for many assets.
What is the future of the savings surplus?
One increasingly widespread belief is that global excess savings have peaked and are set to drop. This view, articulated for example by Goodhart and Pradhan in The Great Demographic Reversal (2020), rests in part on the ‘lifecycle hypothesis’: the notion that as people age, they accumulate savings during their working years and then spend them in retirement.
With a much larger share of the population in the developed world set to reach retirement age in the coming years, this thesis holds that savings will drop. If that is right, then it implies that interest rates are likely to rise; and asset prices may come under pressure.
We do not agree. In fact, we think the savings surplus is set to grow significantly in the years to come. This is because, on closer inspection, the lifecycle hypothesis does not stand up empirically.
Consider this chart of the US wealth distribution by age. There is one very striking feature in retirement: net dissaving, ie spending more than one has earned in a given period, is remarkably low relative to savings accumulation in the other age categories. In fact, retirees below the age of 75, far from spending beyond their current income, continue to accumulate wealth.
It is only once people reach 75 that they begin to dip into their savings, and even here the degree is modest relative to the wealth accumulation of other age categories. There are several reasons for this, but an important one is that the distribution of savings is very unequal – most savings are held by the wealthy who have no need to access them to fund their retirement.
Net wealth by age
Taking this into account, we have modelled net wealth to GDP for the US for the next several decades (holding constant wealth to GDP and asset valuations and allowing only the age structure of the population to vary).
As shown below, this leads us to project a continued rise in wealth accumulation. This pattern holds for most developed countries and is likely to apply to much of the developing world too.
Net wealth to GDP (US)
What does this mean?
Interest rates have risen sharply in recent months as central banks try to combat inflation. But we see this rise as temporary. Once inflationary forces abate, as we expect in the coming years, we think interest rates will resume their multi-decade decline as the accumulation of savings once again becomes the dominant driver of yields.
Lower interest rates (all else equal) mean higher asset valuations, and we expect duration-sensitive asset classes – those assets that respond to interest rate changes, such as growth equities, credit, real estate and infrastructure – to be the clearest beneficiaries.
Risk factors
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in December 2022 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this communication are for illustrative purposes only.
Important information
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Financial intermediaries
This communication is suitable for use of financial intermediaries. Financial intermediaries are solely responsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on this document by any other person who did not receive this document directly from Baillie Gifford.
Europe
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018. Baillie Gifford Investment Management (Europe) Limited is authorised by the Central Bank of Ireland as an AIFM under the AIFM Regulations and as a UCITS management company under the UCITS Regulation. Baillie Gifford Investment Management (Europe) Limited is also authorised in accordance with Regulation 7 of the AIFM Regulations, to provide management of portfolios of investments, including Individual Portfolio Management (‘IPM’) and Non-Core Services. Baillie Gifford Investment Management (Europe) Limited has been appointed as UCITS management company to the following UCITS umbrella company; Baillie Gifford Worldwide Funds plc. Through passporting it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Similarly, it has established Baillie Gifford Investment Management (Europe) Limited (Amsterdam Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in The Netherlands. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions (‘FinIA’). The representative office is authorised by the Swiss Financial Market Supervisory Authority (FINMA). The representative office does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited and Baillie Gifford & Co are authorised and regulated in the UK by the Financial Conduct Authority.
Hong Kong
Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 license from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Suites 2713-2715, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone +852 3756 5700.
China
Baillie Gifford Investment Management (Shanghai) Limited 柏基投资管理(上海)有限公司(‘BGIMS’) is wholly owned by Baillie Gifford Overseas Limited and may provide investment research to the Baillie Gifford Group pursuant to applicable laws. BGIMS is incorporated in Shanghai in the People’s Republic of China (‘PRC’) as a wholly foreign-owned limited liability company with a unified social credit code of 91310000MA1FL6KQ30. BGIMS is a registered Private Fund Manager with the Asset Management Association of China (‘AMAC’) and manages private security investment fund in the PRC, with a registration code of P1071226.
Baillie Gifford Overseas Investment Fund Management (Shanghai) Limited柏基海外投资基金管理(上海)有限公司(‘BGQS’) is a wholly owned subsidiary of BGIMS incorporated in Shanghai as a limited liability company with its unified social credit code of 91310000MA1FL7JFXQ. BGQS is a registered Private Fund Manager with AMAC with a registration code of P1071708. BGQS has been approved by Shanghai Municipal Financial Regulatory Bureau for the Qualified Domestic Limited Partners (QDLP) Pilot Program, under which it may raise funds from PRC investors for making overseas investments.
South Korea
Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.
Japan
Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.
Australia
Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth) and holds Foreign Australian Financial Services Licence No 528911. This material is provided to you on the basis that you are a ‘wholesale client’ within the meaning of section 761G of the Corporations Act 2001 (Cth) (‘Corporations Act’). Please advise Baillie Gifford Overseas Limited immediately if you are not a wholesale client. In no circumstances may this material be made available to a ‘retail client” within the meaning of section 761G of the Corporations Act.
This material contains general information only. It does not take into account any person’s objectives, financial situation or needs.
South Africa
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.
North America
Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.
The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission ('OSC'). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.
Israel
Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This material is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.
Ref: 29874 10016976
