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Financial Markets and the influence of demographics – slow moving, but significant

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Demographics is a wide-ranging but nonetheless important topic. In this article we look at the influence of demographics on financial markets. First, we provide an overview of demographic trends as they pertain to Australia. Amongst its Developed Market peers, we believe Australia has very favourable demographics. We then turn our attention to the broad relationships between:

  1. demographic dynamics and economic growth
  2. within population dynamics and their influence on the level of asset prices; and
  3. the relationship between population dynamics and asset price returns.

Finally, we then turn attention on the role that demographics can play with respect to the investment opportunities in equities, fixed income, real assets and uncorrelated assets.

As Sally Auld, our Chief Investment Officer explains, there are some interesting conclusions that come from our analysis. The first is that at least in the US, within population dynamics are suggestive of higher government bond yields over time. For example, as the proportion of the US population that is aged 60+ stabilises in the coming years, then one source of a multi-decade downward pressure on government bond yields should erode in our view. Another interesting conclusion is that the more significant the proportion of the population that is aged 60+, the lower the excess return that equities usually deliver over government bonds, all else equal.

From a macro-economic perspective, we can see clearly that stronger population growth is generally associated with:

  1. relatively stronger economic growth; and
  2. a relatively higher term structure of interest rates.

However, the caveat to this is that while headline growth indicators can be bolstered by strong population growth, a country’s standard of living can only rise if productivity lifts. Stronger population growth also appears to be positively correlated with residential property prices in the short-run.

Within equities, the significance of demographics emerges via thematic investment trends and marked contrasts in population dynamics on a geographic basis. The ageing population in some large economies suggests a desire for exposure to health care, the healthy eating thematic and the search for yield. The growing influence of Millennials has given rise to interest in exposures to the ESG complex and to companies with new and disruptive business models. This cohort have also had considerable influence upon the growing importance of decentralized finance. From a geographic perspective, there are some clear trends that favour South Asia and Africa as investment destinations, at the expense of Germany, Japan and China.

For fixed income, we also highlight geographical differences and their importance for investors in this asset class. Generally, we are favourably biased towards economies with stronger population growth, given this implies a deeper pool of investable fixed income assets and a relatively higher coupon on fixed income instruments.

The relationship between Real Assets and demographic trends is very strong. In this asset class, demographic dynamics can be a significant tailwind to returns, given the essential nature of Real Assets (such as Infrastructure and Real Estate) to the efficient functioning of society and their role in supporting basic needs such as shelter. We consider the impact of demographics on Real Assets through the lens of an ageing population, urbanisation and the rise of the Asian middle class.

In the space of uncorrelated assets, we focus on two stores of value – Gold and Cryptocurrencies. Here, the thesis is that changing demographics – in particular, the growing importance of Millennials – may have a significant influence on the relative performance of these assets going forward. For further information about the role demographics plays in your investment strategy, contact JBWere today.