The greying of the developed world is forecast to accelerate, according to Russ Koesterich, iShares Global Chief Investment Strategist, in his latest Market Perspectives report.
“But whilst the societal implications are unclear, there is almost certain to be a subtle but persistent influence on a country’s economic well-being, which will impact everything from economic growth to equity multiples.
“Most developed countries will see slower growth in the workforce as more people retire. All else being equal, slower growth in the working age population should translate into modestly slower economic growth.” According to Koestrich, from an investment standpoint, there are at least three major implications:
1. Lower valuations: slower growth countries are likely to trade at lower valuations versus faster growing economies, suggesting that the historical premium developed markets have enjoyed over emerging markets will reduce over time.
2. Lower multiples: over the long term, corporate profits are driven by real economic growth. In turn, equity multiples in developed countries are likely to remain low and may not revert back to their long-term average. Further gains will need to be predicated on earnings growth rather than higher multiples.
3. Lower real interest rates: Historically, slower growth and lower demand for capital have been associated with lower real interest rates. The eventual rise in real rates may be less than many expect.
“The trend towards an older population has been in place for decades but the pace is set to increase,” says Koestrich. On a national basis:
• The US: the trend will be somewhat gentler in the US due to a relatively high birth-rate and immigration, but the economic impact of an ageing population is still likely to be severe given the precarious state of US entitlement programmes. The US is uniquely unprepared, due to the persistent failure to tackle unfunded liabilities.
• Australia: Australian demographics are likely to be worse than the US, but the country is arguably much better prepared for those changes due to its superannuation retirement system, which has minimized unfunded liabilities. After a decade of compulsory contributions, Australian workers have more than USD1.2tn, more money invested in managed funds per capita than any other economy.
• Emerging markets are likely to enjoy the most favourable demographics. Investors looking to mitigate the impact of ageing populations should consider raising their allocations to younger markets such as India, Brazil, Indonesia, Mexico and the Philippines, and to companies that generate a growing percentage of their sales from these regions.
• China: The notable exception amongst emerging markets is China. While China’s demographics look favourable compared with Japan, Europe and the US, it is set to age much faster than several of its emerging market competitors, due to several factors including the country’s notorious one-child policy.
• Japan: Japan stands out as a demographic nightmare. A combination of low fertility rates, no immigration and rising longevity makes Japan an outlier. If there were not enough reasons already, investors should probably avoid long-term positions in Japanese stocks.