Market Perspectives
Not So Golden Years: How an Aging Society Can Impact the Markets (June 2012)
by Russ Koesterich, Managing Director
iShares Global Chief Investment Strategist
Demographics exert a significant influence on both economies and financial markets, an impact that will grow in the coming years. The graying of the developed world is hitting an inflection point and is forecast to accelerate. While we don't necessarily envision some of the more dire predictions - an aging society does not necessarily lead to generational war - an unprecedented shift in demographics is likely to impact everything from economic growth to equity multiples.
Absent significant changes in immigration policy or retirement age, most developed countries will see slower growth in the labor force as more people retire. All else equal, slower growth in the working age population - and in some cases actual shrinkage in the work force - should translate into modestly slower economic growth.
From an investment standpoint, there are at least three implications:
1. Historically, slower growth and less demand for capital have been associated with lower real interest rates, suggesting that an eventual rise in real rates may be more tempered than many analysts expect.
2. Equity multiples in developed countries are likely to remain low relative to their historical averages, suggesting that further gains will need to be predicated on earnings growth rather than higher multiples.
3. Slower growth countries are likely to trade at lower valuations versus faster growing economies, suggesting that the historical premium that developed markets have enjoyed relative to emerging markets is likely to compress over time.
All of the above implies that in an aging world growth is likely to command a premium. Among the developed countries, US demographics appear better than virtually any other developed country. However, they are still generally much worse than emerging markets. To the extent that demographics drive growth, investors can consider equities in Brazil, Mexico, India, Indonesia and the Philippines. At the same time, we believe investors should avoid Japan at all costs.
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