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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
L ong-range economic
forecasting has always
been an inexact business
at best. Right now, its dif-
ficult for many investors to think two or
three years outnever mind decades. The
world is still feeling the aftershocks of the
great global recession, and many people
are concerned about the future impact of
the steps that governments around the
world have had to take in order to avert
a deeper crisis.
From the Special Outlook 2013 Issue of Merrill Lynch Advisor
2031
By Scott Eden
But a handful of far-reaching and unde-
niable factors are reshaping our world, and
are likely to continue to do so for decades
to come: A global population on pace
to exceed 8 billion by 2030. A rapidly
growing emerging-market middle class
that will strain the worlds food, water
and energy resources. A global climate in
flux, with increasing incidents of extreme
weather. Aging populations in countries
around the world that could threaten
economic growth and test national fiscal
stability. In the coming years, all these
factors could present obstacles to global
growth, but will also create opportunities
for innovative thinkingand new markets
we havent yet recognized.
A Solution to the Deficit
Of course, the near term continues to be
saddled with serious economic challenges.
At the start of 2013 in the U.S., one of
them will be the effort to tame the federal
 outlook 2013

budget deficit. As a percentage of gross domestic product, the

43
The median age
debt remains dangerously high according to some recent in wealthy
readings, the figure topped 100%. How robustly and quickly countries, up from
Washington responds to this challenge will have an enormous 38 in 2010
bearing on the future strength of the U.S. and global economies.
According to some political and economic observers, it could take
another 10 years for the U.S. to produce a solution to its deficit problem
that will endure.
While many people are focused on tax rates or Federal Reserve policy as the primary
factors in our current fiscal situation, the key to solving it is tackling entitlements,
according to Christopher J. Wolfe, chief investment officer, Merrill Lynch Wealth
Management Private Banking and Investment Group. In his view, the countrys fiscal
crisis will not truly be under control until both Medicare and Social Security are recali-
brated. In 2011 the eldest members of the baby boomer generation turned 65. And for
the next 17 years, 10,000 Americans per day will become eligible to draw both Social
Security and Medicare benefits. That demographic swell will be the prevalent factor in frontier
any federal budget imbalances in the future, Wolfe believes.
Once our deficit issues are resolved, assuming they are, investors will almost cer- markets
are likely
tainly be turning their attention to the global megatrends that have been evolving all
the while. These are the five factorsas identified by analysts and investment experts
at BofA Merrill Lynch Global Research and the Investment Management & Guidance
teamslikely to have the most profound impact on the global economy within the
to see the
Cover and This spread: Siri Stafford/Getty Images, Spiraldelight/Getty Images, Yamada Taro/Getty Images, Istockphoto, Mark Newman/Getty Images, Blend Images/Veer

next two decades.

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

MERRILL LYNCH ADVISOR tm

3
 16%
effect of its maturing workforce, the trend could curb its growth
prospects over the course of the next two decades. Today, just
8% of the Chinese population is 65 or older. By 2030, that
will double to 16%, while the percentage of Chinese citizens Percentage of
of working age will fall from its recent high of 72% to 68%. Chinese citizens
Chinas new leadership is certainly aware of the problem, over age 65
recently signaling a potential repeal of the one-child law. They by 2030

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.

of wealth Income Another huge structural imbalance has developed

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.

A greater As a result of the revolution in shale-gas extraction

through hydraulic fracturingknown as frackingthe
Demand holy grail of energy independence appears to be a real

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

BILLION TONS OF OIL EQUIVALENT

ment must be designed to reduce Other renewables
energy consumption, Nahal says. 16 Biomass
If history is any guide, the effi- Hydro
The amount of ciency gains will come. Were it not 14
global GDP Nuclear
for the technological advances of
12 Gas
currently spent the past 40 years, energy use would
Oil
on energy be as much as 60% higher than it 10 Coal
is today. It only makes sense for the
private sector to continue this trend. 8
The general rule of thumb is that for 6
every dollar you invest in energy efficiency, you
achieve two to four dollars in terms of long-term cost 4
savings, Nahal says. You may or may not believe in
2
climate change, but energy efficiency is all about reduc-
ing costs. And its hard to argue against economics. 0
1980 1990 2000 2010 2020 2030

Sources: International Energy Agency,

A rising Global A second critical demographic shift is the con-

tinuing mass migration from rural to urban
BofA Merrill Lynch Global Research

Middle Class environments. Even though the gulf between

rich and poor will remain wide in many
regions, the net result of this movement into
cities will be an expanding global middle classbecause, generally speaking, urbanization
tends to coincide with rising income levels. According to the Global Trends 2030 report,
within 20 years a majority of the worlds population will, for the first time in history, have
risen out of poverty. Even according to conservative estimates, the number of people in the
middle class worldwidewhich has differing definitions, depending on the sourcewill
likely double to 2 billion by 2030.
The changes produced by this trend will be radicalas radical, some believe, as the
disruptions wrought by the Industrial Revolution in the 18th century. Because a dispro-
portionate amount of that middle-class expansion will occur in developing and frontier
markets, those nations will account for an even larger portion of global economic growth.
Already, the bulk of economic expansion comes from the developing worldemerging

MERRILL LYNCH ADVISOR tm

5
outlook 2013

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

1/3 caused by its aging demographics.

Meanwhile, spending by middle-class consumers in North America and
Europe is expected to rise by just 0.6% per year on average over the next 20
The proportion of years, while middle-class consumption in Asia is expected to increase by 9%
global economic annually. As Mobius has pointed out, a kind of snowball effect could develop:
growth China will If developing countries are perceived as having more promising opportunities
provide by 2025 for middle-class growth, that could attract the skilled workers necessary for
further prosperity.

Food and A growing global middle class is a double-edged sword.

While reducing poverty is an undeniable good, consump-

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.

MERRILL LYNCH ADVISOR tm

7
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