Aging and Equality: Selling stocks for the long term

“The intriguing job of economics is to show men how little they know about what they can design.” – Friedrich Hayek

“It simply came to our notice then Hardness In economics. Unfortunately, this also brings Is dead. ”- Responsible for Richard Hailbronner

In economics, everyone likes to make fun of economists. Even economists.

Perhaps the field is too complex for our Simian brain to understand: after all, variables – GDP growth and interest rates, for example – are all interrelated, making it difficult to wrap our minds around them. After all, we create a mental map of positive and negative feedback loops. Worst of all, we create something like a circular reference in Excel that can crash the spreadsheet.

But sometimes economists are clearly irrational and foolish. For example, Bank of Japan (BOJ) Governor Haruhiko Kuroda is buying stocks, bonds and exchange-traded funds (ETFs) to address what is essentially a demographic problem. In his defense, he is not the first BOJ governor to follow such a course, and he has only financial power in his hands. But that power could be better utilized by attracting millions of immigrants who are needed to help Japan avoid the last demographic collapse.

Headwinds are rampant: Japan’s population is expected to shrink by 40% between 2020 and 2100, from 126 million to 75 million. Filling the pockets of the rest with money doesn’t stop the tide of losing 50 million people: it’s like giving passengers a bailing bucket. Titanic.

Unfortunately, Japan is a haven for what is coming in many parts of the world. And while fewer people may be good for the environment, it’s terrible for civilization. Economic growth depends on the growing population. And the fabric that holds society together is always torn when the economy opens.

This trend is also frightening for investors: the elderly tend not to buy stocks.

So what exactly is the relationship between the stock market and population growth? Why are demographic trends so important for equity returns?

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The driver of the stock return

Simply put, the growth of companies requires economic growth, and the productivity and working age population drive that growth. We have found no way to stop the aging process, so an expanded population is needed to replenish and expand the number of workers who contribute to the economy. If that working age group shrinks, stagnation can build up and companies can spend more difficult time increasing their revenue and earnings. As a result, their valuation will decline because they depend on the expected growth.

But there is more to this equation: every transaction has a buyer and a seller. Young and middle-aged tend to buy more stocks: they have longer investments and thus have more potential for risk in equities. In contrast, seniors are net sellers because they de-risk their portfolios by going from stock to bond. So, according to the age of the population, who will be there to buy the stock?

One way to look at the impact of population change is to calculate the middle to old age and price-to-earnings (P / E) ratio. Zheng Liu and Mark M. Spiegel of the Federal Reserve Bank of San Francisco “Boomer Retirement: Headwinds for the US Equity Market?”

We replicated their approach using cyclically adjusted P / E (CAPE) ratios, showing that the valuation of U.S. stocks between 1950 and 2020 was largely driven by population changes. When the proportion of middle-aged, or 40- to 49-year-olds, compared to the elderly, or between 60 and 69 years, the stock valuation increases. Instead, the higher the valuation, the higher the stock return.

It will also help explain the technical bubble towards the end of the millennium, as middle-aged people grew faster than older people and increased demand for supplies.

Price-to-earnings and middle-to-old ratio in the United States

Line chart depicting the price-to-earnings and middle-to-aging ratio in the United States
Source: Robert J. Schiller, United Nations, Factor Research

Global population forecast

If population growth contributes to economic prosperity and stock valuations, the United Nations (UN) population forecast gives a glimpse of the future.

2.1 Fertility rate – Every woman is born 2.1. Children are considered average – the rate of replacement, or what is needed to maintain the current population level.

World Population Growth Forecast Based on Fertility Rate (in Billion): 2020 to 2100

Source: United Nations, Factor Research

Today’s global population.8. billion and is expected to increase by 100%. billion billion, by 2100. Of course, this result depends on which of the UN’s potential fertility rate scenarios is implemented. The population of developed nations is predicted to grow only in an environment with high fertility rates. If this fails, growth is expected to be limited to emerging markets.

In the UN Moderate Fertility Forecast, Africa is the only region that is expected to cross the threshold of replacement in the next 80 years, with rates declining over time.

Fertility rate forecast: 2020 to 2100

Source: UN (Medium Optional), Factor Research

Population gain and loss

If an increased population is critical for global economic growth and stock returns, with global population growth expected in the next 80 years, why is the outlook so dire?

It comes down to how growth is distributed. The United States is the only developed country in the top ten of expected population growth. Otherwise, the only African nation is Pakistan.

Perhaps this century will belong to Africa and the continent’s emerging economies will evolve. Unfortunately, history suggests that this is not entirely possible. Among the most developed countries in the world in 1900, 90% were still among the most economically developed countries 100 years later. Japan and South Korea went from poor to rich and Argentina went from rich to poor, but otherwise the positions of the developing and the advanced were largely stable.

And Africa has struggled to realize its potential. None of its five nations jumped like South Korea, which was poorer than many African states in the 15050s, but developed into an industrial power. Cheap labor is a classic development model, but it did not work in Africa.

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The more distorted the view, the more likely it is that the fertility rate will be higher than expected. A stagnant economy can turn a rapidly growing population into a declining one. For example, Iran’s fertility rate fell from 165 in 1990 to 5.6 in less than two decades in less than two decades.

In contrast, the fertility rate did not increase dramatically anywhere. Nor can they be expected. So population reduction is more realistic than growth.

In rich countries like Italy and Spain, the forecasts are particularly harsh. They are expected to lose 34% and 29% of their population, respectively. The reflection of the global economy will be fatal as the demographic decline has spread to many rich countries of the world. The shrinking population makes governance more difficult as public services such as education and healthcare become more expensive.

Top 10 Population Profits and Losses by Million (in Millions) by Country: 2020 to 2100

Source: UN (Medium Optional), Factor Research

Long-term approach to assessment

In terms of this forecast and the relationship between population dynamics and stock valuations, what is the U.S. market outlook? Unlike many in the world, the United States is expected to grow its population in the current century, but that population will grow older on average.

Naturally, the assessment-to-population correlation is not a linear relationship and currently the CAPE ratio is above its historical historical average and this is where it should not be based on population dynamics. But as more U.S. workers retire, they will switch to equity for bonds, which is not good for long-term demand for the stock. Every seller needs a buyer.

US price-to-earnings ratio: forecast for the next 80 years

Source: Robert J. Schiller, United Nations, Factor Research

More thoughts

This demographic trend has both good and bad news for investors.

Fortunately, most dramatic population declines are expected after 2050. Previously, only Japan has been significantly affected. Perhaps it’s finally time to shorten the Japanese government’s bonds?

Otherwise, these forecasts create a strong case for selling all asset classes, not only for long-term stock sales, but also for economic growth. This means bonds, real estate and personal equity.

For this, investors need to evaluate the traditional resource allocation structure and consider strategies that are less dependent on a healthy global economy and an expanding population. This means anti-fragile portfolio strategies and securities that actually benefit from unrelated or more advanced economic and financial instability unrelated to the traditional tier asset class.

Like drowned passengers Titanic, Investors have no place to hide and no safe haven to wait for.

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Image Credit: Getty Images / Urbajan

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Nicholas Robben

Nicholas Robben is managing director of Factor Research, which provides quantitative solutions for factor investing. Previously he founded Jacada Capital, a quantitative investment manager that focused on equity market neutral strategies. Previously, Rabener focused on real estate across the property class at GIC (Singapore Investment Corporation Government). He started working for Citigroup at Investment Banks in London and New York. Rabner holds an MS in Management from the HHL Leipzig Graduate School of Management, is a CAIA charter holder, and enjoys endurance sports (100km ultramarathon, Mont Blanc, Mount Kilimanjaro).

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