Long Term Shifts In Global Investment

By M. Isi Eromosele

The recent and still ongoing global financial crisis followed two decades in which capital became increasingly cheaper and easily available. For several reasons, global interest rates have remained low up to today. There are many reasons for this, including continued economic weaknesses in developed economies, weak demand for credit by households that are heavily in debt and monetary policies by global Central Banks aimed at inspiring growth. As such, a number of analysts are concluding that low interest rates will be prevalent for the long-term.

The Oseme Finance analysis reveals that the low interest rate scenario will certainly end in the next few years. Our findings show that the long-term trends in global investments and savings, which had contributed to low interest rates in previous years will invert in coming years. This is because the emerging economies have started a building boom that is expected to last for the next two decades, at the very least.

These emerging countries are experiencing fast-track urbanization, which has raised the demand for new road transportation networks, ports, educational institutions, water systems, energy systems, medical facilities and other infrastructure facilities. New factories are being built, new machinery is being bought and new housing is being built for a growing workforce.

However, several factors, including an aging population in these countries will limit the growth in global savings. Therefore, it is apparent that the world is entering an era where the desire to invest surpasses the readiness to save, which would inevitably result in higher interest rates.

It is expected that increased capital costs will be beneficial to savers, which could result in muted borrowing. This would limit capital investment, in the end slowing global growth.

Our analysis also indicates:

Investment rate within advanced economies has been declining since the 1980s, which saw investments (gross capital investment) from 1985 to 2007 drop by $25 trillion, compared to previous investment levels. This considerable drop in capital demand certainly contributed to the fall in global interest rates that lasted for two decades, fueling a sense of false security in the global capital credit markets.
The world is about to experience a new wave of huge capital investment that will be primarily propelled by emerging economies. We forecast that by 2018, demand for global investment will have reached astronomical levels
This projected investment thrust will put pressure on global interest rates unless people around the world increase their savings rates considerably. Looking forward, our analysis indicates that this increase will result in a serious break between ability to save and readiness to invest
The above chasm between the need for capital to invest and sustained savings level will unavoidably result in long-term interest rates. This will result in reduced realized investment, which may conceivably prompt more savings. We expect that long-term interest rates may start moving up again within the next three years as investors start to price the long-term structural shift.

The above findings have crucial inferences for global businesses, financial institutions, investors, consumers and governments. They will need to adapt themselves to a world where investment capital is more costly and less available, with most of the global investment occurring in emerging economies.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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