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Special Outlook Issue
Outlook
2031
Five trends that will shape our future world
Outlook
Five trends are primed to shape the world
economy profoundly in the decades to come
2031
By Scott Eden
L ong-range economic
forecasting has always
But a handful of far-reaching and unde-
niable factors are reshaping our world, and
stability. In the coming years, all these
factors could present obstacles to global
been an inexact business are likely to continue to do so for decades growth, but will also create opportunities
at best. Right now, its dif- to come: A global population on pace for innovative thinkingand new markets
ficult for many investors to think two or to exceed 8 billion by 2030. A rapidly we havent yet recognized.
three years outnever mind decades. The growing emerging-market middle class
world is still feeling the aftershocks of the that will strain the worlds food, water
great global recession, and many people and energy resources. A global climate in A Solution to the Deficit
are concerned about the future impact of flux, with increasing incidents of extreme Of course, the near term continues to be
the steps that governments around the weather. Aging populations in countries saddled with serious economic challenges.
world have had to take in order to avert around the world that could threaten At the start of 2013 in the U.S., one of
a deeper crisis. economic growth and test national fiscal them will be the effort to tame the federal
fastest
An Older As life expectancies have risen around the globe, there has
been an inevitable rise in the average age of the worlds
economic
World population. This is especially true in developed coun-
tries. Nations with aging populations generally suffer growth in
economically and become less globally competitive, while
youthful countrieswhich boast more vigorous, productive workforcestend to the next 20
years.
experience faster growth. By 2030, the median age in wealthy countries that are part
of the Organisation for Economic Co-operation and Development (OECD) is expected
to jump to nearly 43, up from 38 in 2010. Already, the median age in Japan and
Germany is past 45. In the U.S., where the demographic swell of the aging baby-boom
generation stands to imperil the nations fiscal stability, the median age is 37.
The problem isnt limited to developed nations. The demographic issues that many
emerging markets may encounter over the next 20 years are the same issues that the de-
veloped world is encountering now, says Alberto Ades, head of emerging-market research
at BofA Merrill Lynch Global Research. According to the Global Trends 2030 report
recently published by the National Intelligence Council, the median age of almost all
societies around the world is rising rapidly, except in sub-Saharan Africa. For this reason,
the report maintains, the so-called frontier markets, especially countries in Africa, are
likely to experience the fastest economic growth over the next 20 years. As Mark Mobius,
executive chairman of the Templeton Emerging Markets Group, notes, many institu-
tional investors have grown enthusiastic about some of the more politically stable frontier
markets, attracted by their fast growth and young populations.
Because of its one-child policy, China has the most daunting aging problem
among the major emerging economies. Though the country hasnt yet felt the full
If the
have big ambitions, Ades says of the Chinese regime, and Im
sure they dont want to be hindered by a policy that was instituted
disparity
30 years ago.
continues,
across the globe over the past 20 years: the increasing
Inequality disparity in wealth between the very rich and everyone
else. In the U.S., the top 1% of earners collects nearly
recessions a quarter of all income, and the top 10% takes home
halfmore than at any time since the pre-Depression 1920s. In other words, the
could last base on which economic recoveries are built has meaningfully shrunk. If this imbal-
ance continues, or gets worse, recessions could last longer and recoveries could be
longer and
less robust.
But income inequality isnt solely an American phenomenon. Other developed
economies have seen this gap widen as well, as have many emerging nations. Deeper
recoveries income inequality around the world will have geopolitical implications that could
include greater risk of unrest and heightened political instability in the developing
could world. In China, the wealth imbalance is already a divisive and potentially volatile
issue, with the countrys ruling party leadership recently taking steps to stamp out the
be less
grossest corruption among the governing elite, who have reaped much of the wealth
throughout Chinas run of staggering economic growth.
In the U.S., Wolfe believes, successfully addressing this issue will require making
robust. changes in mandated entitlement programs. When Social Security was created as
part of the New Deal, there were 159 taxpayers in the workforce for every
retiree receiving benefits. That ratio now stands at just three to onea level
3:1
that is clearly unsustainable. By 2033 the Social Security Administration
will run out of money, according to the funds own trustees, and payroll
taxes would be able to cover only three-quarters of eligible Americans.
Ratio of taxpayers By adjusting policy to reduce the load on todays workers, Wolfe
to retirees receiving believes that their compensation would have greater potential to rise
Social Security allowing more younger workers to purchase houses, for examplea key
trigger for a new economic cycle.
For Energy
possibility for the U.S. At the same time, concerns over
Unless otherwise indicated, statistics climate change and carbon emissions, along with rocket-
come from the OECD; the National
ing demand for energy as global middle-class consump-
Intelligence Councils Global Trends
2030 report; the Social Security
tion increases, may force the worlds economies to find
Administration; and BofA Merrill Lynch
Global Research as of Dec. 10, 2012.
outlook 2013
ways to lower their energy costs, says Sarbjit Nahal, head of sustainability megatrends
analysis at BofA Merrill Lynch Global Research. Those gains could come through in-
creasing reliance on non-fossil-fuel energy sources, or through improved efficiency.
Demand is set to explode. According to Nahals estimates, world energy consump-
tion will jump 50% over the next 20 years. That kind of rise will almost certainly result
in higher oil and energy prices across the board. Today, the equivalent of about 9%
of global GDP is spent on energy costs. We simply think thats not sustainable from
a long-term perspective, Nahal says. The world cannot afford to be spending that
amount of money on energy.
Energy Demand
The good news is that enormous opportunities exist for innovation in energy efficiency.
Buildings, for example, account for 40% of energy use in terms of emissions worldwide,
on the Rise
says Nahal. Even in the U.S. a huge percentage of buildings are under-insulated. People Consumption is expected to increase by
are upping the air-conditioning, and its literally going out the window. Elsewhere, the 50% in the next 20 years, according to
BofA Merrill Lynch Global Research. As
sprawling server farms and data centers that power the Internet now consume as much as
a result, improving energy efficiency will
7% of the electricity produced in the developed worldinformation technology has
assume critical importance.
now overtaken the airline industry as a source of emissions. As with automo-
biles, the next generations of IT equip-
9%
18
markets are responsible for more than half of global GDP growth, and 40% of investment
worldwide. According to the World Bank, China alone is likely to provide a third of the
worlds economic growth by 2025, even taking into account any potential slowdown
within water
security
tion levels are virtually certain to rise along with income
levels. This, in turn, will place unprecedented strain on the
20 years,
planets resources.
One major issue involves diet: The higher the household
a majority
income, the more often people eat meat. As protein-heavy
diets become more prevalent, demand for food and water will increase. It takes 15,000
liters of water to produce a kilogram of beef. It takes 1,500 liters to produce a kilogram
of the of grain, Nahal notes. And this puts increasing pressure on global food security and
water security. If current trends continue, Nahal says, within 30 years water demand
world's
will exceed water supply by 40%.
The problem will only be worsened if global temperatures continue to rise, and if the
population
extreme weather cycles predicted by many climate scientists threaten crop yields in the
worlds breadbaskets. By the end of August 2012, 65% of the continental U.S. was in
a state of moderate to exceptional drought. As of November 2012, the average global
will have temperature in each of the previous 333 consecutive months has been higher than the
20th-century average.
risen out of
When it comes to water sustainability, the problem is both local and global. For
example, half of Chinas GDP is now derived from water-stressed provinces. Meanwhile,
poverty.
46 countries are currently suffering from water stress or water scarcity. (Water stress
refers to a temporary regional condition in which demand for freshwater exceeds local
supply; water scarcity refers to long-term or even permanently degraded water-supply
conditions that can ultimately lead to famine.) Over the next decade, says Nahal, were
looking at an increase of anywhere from three to nine times in water stress in different
regions of the world.
According to Nahals teams calculations, if the status quo remains and no efficiency
gains are made, the worlds diminished freshwater supply could cut the forecast for 2050
global GDP almost in half. On a more immediate level, water stress could begin posing
challenges to companies. Their concerns range from ensuring adequate water supply to
dealing with the realities of large population shifts because of freshwater scarcityor
www.ml.com/insights rising seas and coastal flooding, in the case of a warmer planet.
For more global investment insights, As with all these large trends, the issues of food and water security will nonethe-
visit www.ml.com/insights less create opportunities for innovative problem solvers. Says Nahal, Water today is
6 www.ml.com/mladvisor
A Thirsty
Planet
Forty-six countries
currently suffer from
some degree of water Current baseline
stress. Researchers at water stress
BofA Merrill Lynch Low (<10%)
Global Research Moderate (10-20%)
believe that the degree MediumHigh (20-40%)
of water stress could High (40-80%)
increase between three Extremely High (>80%)
and nine times over the Arid and Low Water Use (N/A)
next decade. Missing Data
Source: World Resources InstituteAqueduct Project
probably a $500 billion market. We think thats going to grow to $1 trillion by 2020.
This will include new technologies and new infrastructure that allow for more efficient
treatment and re-use of water, both residentially and industrially. Currently, eight barrels
of water need to be treated for every barrel of North American crude oil thats refined.
By 2025, with the rise in shale gas and oil sands extractionboth of which require large
amounts of waterthat ratio will increase to 12 to 1. According to Nahal, Weve got to
put into practice the logic of the closed loop, where a company uses water, treats it and
then re-uses that same water.
40%
Percentage by
Other opportunities for innovation include water management at the household which water
levelcurrently, in the U.S. up to 60% of freshwater is wastedas well as more demand will exceed
advanced irrigation systems in agriculture and improved water infrastructure. Given supply within
that governments are cash-strapped, Nahal says, we see the private sector playing a 30 years
greater role in creating infrastructure in emerging markets and upgrading it in the
developed world. He sees the private sector accounting for 30% of such investments
over the rest of the decade, up from 19% today.
While these five trends touch on each other in a number of ways, theres one factor
they all have in commonnone of them is exclusive to a country, or even a region.
In other words, from more than just an economic standpoint the worlds borders are
getting blurrier all the time. In this new world, Wolfe maintains, geography is a less
important factor in an investors decisions than sectors, industries and individual com-
panies that have clear leadership positions.
He also believes that investors should consider taking an active role in following the
trends that are shaping growthregardless of where they originate. That, by necessity,
means cultivating an openness to somewhat more speculative growth ideasfrom small-
cap companies to frontier marketsas part of a truly diversified strategy. It means betting
once more on a future thats about solving problems, not succumbing to them.
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