As 2021 dawns and a new decade begins, it’s time to look ahead. While many pundits will be talking about what this new year will bring, it’s time to take a much longer view, out to the beginning of the next decade.
As others will study the impact of technology, such as the rise of robots and artificial intelligence, or the role of the federal government and interest rates, this focus will be on only one aspect of Tomorrowland, and the one that’s the most important — the people and the demographic trends that will impact America.
Because after all’s said and done, it’s not the financing or funding on Wall Street that is at the heart of this industry’s universe, it’s the men and women on Main Street. The population's needs and wants drives the municipal market, making each bond sale special to its own community and residents. This public financing mechanism builds and rebuilds America.
The muni market is the issuers, who along with their underwriters, legal and advisory teams, build infrastructure for people living in states, cities and localities all across the nation. The money raised provides for the building of schools, police and fire stations, roads, tunnels and bridges and furnishes funds for trains, planes and shipping along with a myriad of other uses for the public good.
Over the past 100 years, our way of life has changed significantly and those technological changes, which at first happened incrementally, are now occurring at an increasingly faster pace. Within the next 10 years, the social, political and economic landscape will be dramatically different, even as the mission of public finance will remain the same.
Over the next 20 years, the market will be dominated by a younger generation of bankers and investors who have different priorities and ideals, who value the environment and champion social and racial justice, and who will be the determining factor in what gets built and where and how.
A decade from now, a more diverse, inclusive, multicultural generation will take the reigns and many of The Bond Buyer’s Rising Stars will hold a crucial place in the industry.
While much of the media attention on generations has been focused on Gen Y (the Millennials), Gen Z will be the group to watch as they move up and surpass the wealth of Millennials by 2031.
BofA Global Research released a report last month highlighting the differences between Gen Z (the Centennials born between 1996 and 2016) and the Millennials (born 1981-1995).
“[Gen Z has] never known a life without Google, 40% prefer hanging out with friends virtually [rather] than in real life, they will spend six years of their life on social media and they won’t use credit cards,” BofA said. “They're the ‘clicktivists,’ flourishing in a decade of social rights movements … The Gen Z revolution is starting as the first generation born into an online world is now entering the workforce and compelling other generations to adapt to them, not vice versa. Thus, about to become most disruptive to economies, markets and social systems.”
While Gen Z grew up after the Great Recession, they will feel the brunt of the effects of the coronavirus pandemic on their future job prospects and earnings. They came of age just as the social rights and environmental movements gained widespread attention, and this too has left a mark.
“These experiences have shaped Gen Z to be a very different generation from Millennials — key activists on climate change, fiscally cautious, valuing luxury/quality over quantity and better skilled for an automated world,” BofA said. “We think financial markets often underestimate these differences, assuming Gen Z to be the same as their predecessors, missing the distinctions that help understand the changing new consumer.”
Gen Z will be the most diverse generation in American history, according to the Pew Research Center.
As more new immigrants will join the ranks of Gen Z in the next decade, this generation is projected by the Census Bureau to become a majority of non-whites by 2026.
“Gen Z represents the leading edge of the country’s changing racial and ethnic makeup. A bare majority (52%) are non-Hispanic white — significantly smaller than the share of Millennials who were non-Hispanic white in 2002 (61%). One-in-four Gen Zers are Hispanic, 14% are Black, 6% are Asian and 5% are some other race or two or more races,” Pew said.
In some regions of the U.S. Pew noted that non-white Gen Zers are already the majority. In the West, only 40% of Gen Zers are non-Hispanic white, the same number as Hispanics, while 4% are Black, 10% are Asian and 6% are of another race. In the South, 46% of Gen Zers are non-Hispanic white. In the Midwest, however, 68% are non-Hispanic white, according to the Census Bureau.
Pew also noted that 6% of the U.S. Gen Z population was born outside of the country, compared with 7% of Millennials. However, 22% have at least one immigrant parent compared with 14% of Millennials.
Right now Gen Z is entering the workforce and by 2031 their incomes will have increased by about five times to $33 trillion. Gen Z at 2.5 billion people will also be the largest group in the world, accounting for 32% of the global population, according to the United Nations.
“The growing consumer power of Gen Z will be even more powerful taking into account the ‘Great Wealth Transfer’ down the generations. The Baby Boomer (1946-1964) and Silent Generation (1928-1945) U.S. households alone are sitting on $78 trillion of wealth today,” BofA said.
But this wealth transfer has not started in earnest yet.
While estimates vary on how much money will move from older to younger generations (between $30 trillion and $68 trillion is forecast in the U.S.), what is clear is that Boomers have amassed unprecedented wealth while the Millennials have not. This transfer means that Millennials will take on greater importance in society as the next decade progresses, only to be overtaken by Gen Z shortly thereafter.
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What’s what with Gen Z?
· $10T of lifecycle earnings could be lost by today's students due to COVID lockdowns.
· 9 out of 10 think it's OK to use their phone in bathroom, 36% say its OK in place of worship
· Will spend almost 6 years of life on social media, more than eating, studying combined
· Young surgeons losing dexterity because too much time swiping smartphone screens
· 55% of surgeons say patients mention social media as primary reason for plastic surgery
· Gen Z must emit 8x less carbon than Boomers to stay within 1.5c degree of warming target
· Over 50% of teens sit in silence using their phones for long stretches while with friends
· 72% say they can be part of a social movement even if only participating on social media
· The first cohort where the majority has some kind of meat restriction in their diet
· 58% say they can't be without internet for over 4 hours before becoming uncomfortable
Source: BofA Thematic Demographics Survey
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Just as the Great Recession hit Millennials hard, the lingering effects of COVID-19 will hurt Gen Z's earning potential. However, BofA noted about one billion people globally over the next 10 years will need job retraining because of increasing automation and Gen Z’s tech-focused education and prowess may help them as they enter the workforce.
In contrast to the older Millennials who felt it directly, Gen Z felt the effects of the Great Recession mostly through their families and this has made them fiscally conservative and more cautious about taking on personal debt, according to BofA.
Looking at the economy, Gen Z uses technology as a way of managing their finances, which BofA said implies that banks and asset managers will have to take a hard look at their products and services and reassess them in order to hold onto their new customers, who have much less brand loyalty than in the past.
Additionally, one in three Gen Zers would trust a robot to make their financial decisions — something that will impact financial advisors and fund managers and the way they do business. Only 14% expect their banks to have physical branches.
This will impact the muni market, where issuers and financial advisors will have to embrace new technologies and innovations to keep relevant and reach investors, appealing to socially conscious buyers, both institutional and retail.
BofA said Gen Z's social activism extends into finance and investments so that environmental, social and governance goals are considered core principals and ESG bonds will be necessary securities in their portfolios.
According to a BofA Thematic Demographics Survey, four out of five Gen Z individuals said they will factor ESG into their investing goals.
For the muni market, this will be reflected in the continued rise of municipal green bond issuance, along with the expansion of social and social impact bonding and possibly the introduction of a U.S. government sovereign bond to address income or racial inequality, putting the G into ESG.
About 89% of Gen Z lives in emerging and developing markets — India, China, Nigeria, Indonesia and the U.S. are the top five, the U.N said. In terms of wealth, the U.S. and China will have the largest total Gen Z incomes at $1.2 trillion and $1.1 trillion, respectively, according to Euromonitor.
This too could have implications for the muni market as underwriters will be able to expand their marketing and sales of ESG taxable bonds more freely around the world.
Bond insurance could also increase since European and Asian investors focus on the higher quality of the munis they buy rather than the tax-exempt status of the bonds. Muni bond insurance would boost the quality of some lower-rated bonds to the necessary AA category threshold that European investors seek.
Looking farther into the future, Gen C (Generation COVID), really won’t remember much about this pandemic, but will have to live with its social and economic ramifications.
“It is the generation (2017-present) that will have only ever known problem-solving through fiscal stimulus and free government money, potentially paving the way for universal basic income and healthcare access,” BofA said in its report. “This generation will feel the impact of COVID long after the pandemic ends in terms of how they trust and show intimacy — being trained not to hug, shake hands or even play in groups. Virtual attendance will be as accepted as in-person attendance for all activities, from classrooms, to talent shows, and even family reunions.”
This will have an impact on both K-12 and higher education bond issuance, perhaps resulting in decreased bonding for traditional buildings but increased issuance for substitute educational structures. Time will tell.
In the final analysis, most predictions about the future are almost always wrong because they are too optimistic, too pessimistic or just too fanciful.
Those lucky enough to see the end of the next decade will know the true extent of how America lives up to its promises of life, liberty and the pursuit of happiness. And those in the municipal bond industry will see how much they have contributed to make that possible for this generation and for all generations to come.
For those nitpickers among us, according to date and time experts, each decade begins with a year ending in 1 and ends with a 0 (counting from 1 to 10 starts at 1 not 0 and ends at 10). So this decade, which started on Jan. 1, 2011, will end on Dec. 31, 2020; new decades will begin Jan. 1, 2021 and Jan. 1, 2031.
