Here’s how the Great Wealth Transfer will impact financial markets

Over the next 20 years, the Great Wealth Transfer will happen. And it will have meaningful impact on financial markets.

The Great Wealth Transfer: Here’s how large it’ll be

A$3.5tn (according to AMP) will change hands from Baby Boomers and the Silent Generation to Millennials and Gen Z. And it will mean a lot for the financial markets. Unless of course, younger generations just ‘hang tight’ with that money, but that is unlikely.

Many younger generations are struggling financially being priced out of the housing market, slugged with bracket creep and HECS, while facing an ever rising cost of living. But inherited wealth could change all of that. And it suffices to say that at least some of the A$3.5tn will be equities, whether shares owned directly by ancestors or shares indirectly owned by a super fund.

Will it or will it not have an impact? Well, if these younger generations just hang tight, not at all. But even if only 1% of younger generations decide to act, that’s still $35bn in money that’ll be used differently.

What impact will it have?

It may mean that many stocks preferred by Baby Boomers could be less popular, and lead to declining share prices even if these companies are performing well. Look at a company like CBA (ASX:CBA) for instance. It is one of the best dividend paying stocks on the ASX, but whether or not it is a growth stock is up for debate.

Maybe younger generations will care more for growth stocks rather than income stocks and invest elsewhere. Or maybe they won’t want to invest in stocks at all and would rather invest in property, or perhaps ETFs. Indeed, the rise of ETFs has been because younger generations have preferred them.

Look, we know you could dismiss these as speculations or overgeneralisations, but it will all depend on the extent to which younger investors want to stick with what Boomers thought they knew best or not. Even if they just decide to change fund managers, that could be significant in itself because no two fund managers are alike in their outlook and decision making.

And of course we’ve just been talking about Australia which is just one island in the world. The global Great Wealth Transfer is estimated to be US$84 trillion globally, according to Forbes Magazine. The effects mentioned above could happen in larger share markets (North America and Europe) and any effects could flow through to Australian investors. Not just those invested in such companies but also in markets generally – companies that dominate the exchanges today could decline and new companies could replace them.

Finally, we note that the spending decisions of younger heirs could impact stocks that rely on wealth consumers. Think of LVMH, the world’s biggest luxury brand and one of the world’s largest listed companies outside North America (capped at over US$200bn).

It has grown so much because wealthy people spend on extravagances like champagne, cognac and fashion. If younger people would rather spend it on the bare essentials to build financial security (at least before extravagances), the Great Wealth Transfer could be bad for companies like LVMH.

So, what if you have inherited shares?

We wrote an article just last week on that, which we encourage people to read. There will be a lot of things to take into account in deciding whether to stay or go as an investor. Either way, younger investors will need to make a decision one way or the other – even staying will be a decision.

Conclusion

The Great Wealth Transfer will happen. And a world in which several trillions of dollars is in the hands of an entirely different generation will be a very different one for investors to navigate.

Beyond the potential decline of companies relying on Baby Boomer spending on their goods or services, we could also see a decline in companies which Boomers invest in – and in both cases, replacement by companies relying on Millennial or Gen Z spending.

What possible companies? We can only speculate, but we will write an article down the track addressing that question.

Investors need to be aware of the Great Wealth Transfer and consider what it’ll mean for companies in their portfolio.

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