Demography and Equity Performance

The Financial Times has published an interesting analysis on the linkages between demographic growth and stock market performance in today’s Weekend edition (The Population Conundrum)

Research quoted in the article makes a convincing case that

The 1982-1999 bull market was driven by the post-war baby boom, which resulted in a bulge in the numbers of working-age adults and the core savings group. … Those adults are now retiring, having spent too much time working and not enough time procreating.

Falling birth rates and rising life expectancy have left the industrialised world with a demographic profile very different from that of the 1950s. There is a growing body of evidence to suggest that sharply ageing populations will weigh on both economic growth and asset values for years, if not decades to come.

Although the data refers primarily to the United Kingdom and the United States, we have seen similar evidence to this in other countries. In Greece, for instance, an equity boom occurred from the mid 1990s to 2007. 

Precisely this experience indicates that while demography may have been a factor, there are a number of other factors at work:

a. In the United States, the Individual Retirement Account (IRA) was introduced in 1986. Over time, this had a snowball effect as professional fund managers increasingly channelled this capital into equity markets. It would be interesting to compare stock market performance between countries with IRA-style individual defined-contribution systems with those (such as most continental European countries) where such schemes do not exist.

b. The Soviet Union collapsed in 1989. Starting at this point, there was a moment when Russian, Chinese and Indian competition (and domestic capital) simply did not exist. The opportunity for Western companies such as Kraft, Nestle, Procter & Gamble, McDonalds, RJR Tobacco, Carrefour, Walmart, Caterpillar, Volkswagen, Hochtief, Michelin and others was simply unprecedented. Things are obviously much more difficult now, as the hyper-growth seen in most segments is the former Soviet Union is now over, while Chinese and Indian market conditions are very different. This had a massive impact on US and UK listed company performance.

c. Floating formerly state-owned enterprises on stock exchanges became a major policy priority for governments across the world from the 1980s and onward. Privatisation and listing became a core part of the “Washington consensus”, and was an important part of World Bank, IMF and EU policy initiatives as well as a critical policy for national governments. In addition, general stock market listings became fashionable, with the New York Stock Exchange and the London Stock Exchange becoming magnets for listings not only from the US and UK, but though ADRs and listings of foreign companies, including the dot.com cohort.  Furthermore, the lack of sufficiently deep capital markets in many other countries created an import of capital to the US and UK to invest in their listed companies—yet another example of too much money chasing too few opportunities.

Demography is absolutely critical in many respects. But in this respect, I believe that these other factors account for the higher price/earnings ratios quoted in the article. There was significant capital mobilised for trading, including margin accounts and other unsecured loans for equity purchases, to assure a high P/E.

Having said this, I would not minimise the upside of the demographic shift from Baby Boomers to Generation X. The resulting inheritances will no doubt save many a struggling Generation X household, and the taxes upon this inheritance will save many a government budget, at least in the short term. 

In the longer term, the fundamental questions posed on pension sustainability remain absolutely correct. And, in most countries, absolutely unaddressed.

© Philip Ammerman, 2012

Philip Ammerman is Managing Partner of Navigator Consulting Group and European Consulting Network. His comments are made here in a personal capacity.