The last long cycle (from 1980 to 2000-05) was shaped by exceptional growth in supply on a global level. The next will be dominated by demand dynamics.
Over the last three decades strong growth in the working-aged population across Asia and the opening-up of world trade have led to considerable expansion in global production capacities. These factors created a highly competitive and disinflationary environment of plentiful supply, which was characterised by low interest rates, a credit boom and, in the financial markets, exuberant appetite for risky assets.
As the demographic cycle progresses, we are seeing the emergence of an aging population, which is less favourable to productive investment. Meanwhile the rise in living standards among the emerging population heralds an unprecedented level of growth in demand. The world supply/demand balance is dramatically changing against a backdrop of resource shortages which are likely to favour shorter cycles, increased government intervention in economic affairs and inflation.
While unfavourable for the equity markets, this environment does not however spell certain decline. The development taking place in the emerging world represents the only opportunity for the developed world to move forward in the post-financial crisis era. It will take many years for the equity markets to find their way again, but patience will ultimately bring rewards.
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