The demand for income investing solutions has become more evident each year. Pioneer Investments has engaged in extensive research to identify the key trends behind this demand.
The first trend driving the demand for income is the demographic challenges. The number of people above 65 is forecast to almost double by 2030, while the number of working people to support their pensions should further decrease. There will be more retirees than working people, and the retirement period will likely be longer.
Seven years after the global financial crisis, public debt in most advanced economies has also reached record levels, and is continuing to rise. The debt-to-GDP ratio has surged to 106% in 2014, from 73% in 2007.
Increased regulation is another trend that has translated into greater responsibility at the investor level to ensure a sufficient income in retirement. Financial companies are now less keen to take risk, which is having a double impact. While Solvency II regulations could lower retirement income from annuities in the future as insurance companies move to a more cautious allocation, corporations are favouring defined contribution plans over defined benefit plans in order to limit the impact on corporate balance sheets from regulatory accounting standards.
Cyclical elements are also at play, in particular in continental Europe, where the economic outlook is still very fragile.
The crisis has resulted in low growth rates in real disposable income, making it harder for households to finance consumer spending. Families need income-providing investment products.
Despite the increased demand for income, investor portfolio exposures are generally not positioned accordingly. Investors have moved to a more conservative allocation despite the current economic environment of low interest rates and low yields on government bonds. In all major developed countries the share of household portfolios held in deposits or bonds ranges between 20-50%. This means in most cases a very low income on this portion of the portfolio.
The challenges are not limited to the fixed income. Investors should also be aware that future returns on all asset classes may be lower compared with the past due to current valuation levels and future economic and demographic trends. Despite these challenges, income opportunities are available in equity markets with dividend-paying stocks, and in the multi-asset space thanks to the enlarged investment universe. Opportunities can also still be found in fixed income, where a flexible approach can help to navigate the current market environment.
Unless otherwise stated all information and views expressed are those of Pioneer Investments as at October 20, 2014. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. The content of this document is approved by Pioneer Global Investments Limited. In the UK, it is approved for distribution by Pioneer Global Investments Limited (London Branch), Portland House, 8th Floor, Bressenden Place, London SW1E 5BH, Pioneer Global Investments Limited is authorised and regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority (“FCA”) are available from us on request. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies
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