When we move to a new place, we might find the weather or traffic a bit difficult to deal with. Once we stay there for a while this becomes our baseline and we are no more affected by the things that seemed to bother us earlier. There is no pre-set normal for us, we set our normal based on our experiences and it is a struggle to get adjusted to a new “normal”. Once we adjust to it then this becomes our “normal” – but we will continue to struggle to adapt to changes from this point. This latency in adapting to change creates its own challenges.
Our experience over the last 50 years
Let’s look at the last 50 years or so, after the Second World War, the world has experienced an unprecedented growth. The population grew from 2.5 billion to about 7 billion today, economies have had double digit growths. Rapid development of technology and industrialization helped generate a lot of wealth. GDP of the world went up from $17 trillion to over $120 trillion. Life expectancy has risen from around 40 to over 60 today. On the flip side, over half the world’s forests have been destroyed, pollution, global warming have become serious problems.
In the last 50 years, we have got used to growing population, increasing automation, increasing GDP, and increasing pollution. These levels of growth continuing in the next 50 years is not sustainable and if sustained could pose an existential threat.
What we can reasonably expect in the next 50 years
With declining populations in developed countries and stable populations that will slowly start to decline in the emerging economies – the component of GDP growth driven by increasing population will see a distinct slow down. This does not mean that the growth will not continue, or wealth will not be created – it just means that the portion of growth and wealth attributable to increasing population will not be there as much as it was in the past.
Another key component of increasing GDP is the increasing productivity. As populations get wealthier – majority of the productivity increases have to come through increased use of technology and automation. Wealthier populations may choose to prioritize their leisure over putting in more time to earn more.
There is also a technical limitation of how we measure GDP – gadgets we use have improved in quality multifold over a period of time but their costs have not. For instance the costs of high end cell phones have not increased much over last few years but their quality has increased many fold. This improvement in quality is not being captured in the current GDP calculations.
How are we doing in general?
People are still hankering for “good old days” where growth was significant. Politicians in the developed world are promising to bring back the good old days, and the ones in developing world are promising rapid growth that was experienced in the world over the last 50 to 60 years. One thing we know about politicians is that they are very astute readers of aspirations of the people and are going to appeal to them.
When the expectations of high growth are not met, sometimes this is being blamed on immigration (in developed countries). Resentment for immigration in the developed world is higher than it ever was.
India is struggling to create about 10 lakh jobs a month to be able to absorb 1% of the 1.2 billion population that is coming into the job market every year. This is leading to clamoring for reservations, general feeling of dissatisfaction in college campuses, and disillusionment in some of the youth.
How are investors in India coping?
There is a large set of investors in India who still believe that real-estate will continue to give the outsized returns that it has in the last 50 years. These expectations are not taking into account that there is an unprecedented inventory of unsold property in the market, that rental yields are at the lowest ever, and price to income ratios are at the highest ever.
Investors in the stock markets continue to believe that India will grow at over 7.5% for a long time and will continue to generate returns that were witnessed in the past. These expectations are not taking into account that there is a slowdown in the global markets, across the world most governments and corporates are struggling with debt levels which are highest ever, and overall global growth potential is decreasing.
Smelling the coffee
The next 50 years are going to be significantly different from the past 50, in terms of growth rates and wealth creation.
- The world will continue to experience growth, albeit at a slower pace.
- People will continue to work hard, companies will continue to innovate and create value.
- Equites as an asset class will continue to lead returns vis a vis other asset classes, as businesses will continue to be the investment vehicles that will be able to harness talents and resources for creating value.
We need to come to terms with the new realities and have our expectations aligned to be in the best position to make prudent decisions.