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How Structural Changes in the World Economy Affect Markets

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The real explanation

I believe structural transformations to the world economy, namely changing demographics and profound technological innovations, are the forces behind recent volatility and asset valuation dispersions. Indeed, these important big picture trends, which I’ve written about many times before, help explain some of the major risks to markets and the global economy today.

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Market Realist – Changing demographics and technological innovations affect the Markets

For the last few years, the world has been in the midst of a major demographic transition, which has affected the world economy. The aging population is one of the most visible global trends prevalent in many countries. According to UN (United Nations) data, older people (60 years and older) comprised 9.2% of the total population in 1990. It increased to 11.7% in 2013. The UN expects the share of older people to increase to 21.1% by 2050. The issue of an aging population is most acute in developed countries compared to developing countries (EEM).

The aging population has major social and economic consequences such as a lower supply of skilled manpower. It also leads to shifting demands, from physical assets such as cars and houses (ITB) to services such as healthcare (IXJ), thus affecting broader economic growth. Older people are also risk-averse and have a high propensity to save more, which would lead to higher investments in bonds and Treasuries while equities would see declining inflows.

Technological innovations

Technological innovation is another force transforming the global economy. A study by Christine Zhen-Wei Qiang and Carlo M.Rossotto shows that a 10% increase in broadband penetration would lead to a 1.4% increase in GDP (gross domestic product) growth in emerging markets. Technology (IGM) helps create tremendous value for corporations and governments. Technology (IYW) is also an important enabler for innovative product development.

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