Are falling populations bad for the economy – and, by extension, markets – whilst rising populations positive? Based on financial publications we follow, many experts think so. But Fisher Investments UK’s reviews of data and history suggest this isn’t the case. According to our research, demographics aren’t a market driver – they shouldn’t factor in your economic or market outlook, in our view.
The specific concern we see is that countries with ageing populations and low birth rates risk long-term economic stagnation – even decline. In a similar vein, nations with younger populations are allegedly primed for fast growth. The logic underpinning this thinking: human capital alone determines economic output. Said another way, without young people to replace retiring workers, Europe, China and Japan will slump, whilst younger-skewing Asian, Middle Eastern and African nations leap forward, based on financial publications Fisher Investments UK reviews.
But our research has found this thesis doesn’t hold up. Consider the US, which we think is illustrative since it is the world’s largest economy and equity market.[i] Its general fertility rate (which refers to the total number of live births per 1000 women age 15 – 44) has trended downward since 1970.[ii] Whilst the total fertility rate has been either at or around the replacement rate of 2.1 children over the past 50 years, the figure has trended downward since 2007.[iii] Moreover, the number of US residents age 65 or older has nearly doubled from 9.8% to 17.3% since 1970 – a combination of both fewer babies and a greying populace.[iv]
Yet these allegedly worsening demographic trends didn’t prevent an overall strong, prosperous period for the American economy or equities: US gross domestic product (GDP, a government-produced measure of economic output) more than quadrupled since 1970, and US equities delivered an annualised return of 9.5%.[v] Yes, over those 50-plus years, there were recessions (extended economic contractions) and bear markets (prolonged, fundamentally driven declines exceeding -20% in equity markets).[vi] That is the nature of the economic and market cycle, based on our research. But Fisher Investments UK has over 50 years of data showing supposedly worsening demographics didn’t cause economic decline.
This isn’t just an American story, either. In Europe, we have seen experts blame sluggish growth – particularly in Italy – on demographics. But consider, Italy’s Old Age Dependency Ratio (OADR, which reflects the number of people age 65 and over for every 100 working age persons) has been similar to Germany’s.[vii] In 2005, Italy’s OADR was 32.0 whilst Germany’s was 31.1, both above the OECD average of 23.4.[viii] As of 2023, Germany’s OADR actually nudged ahead of Italy’s, 41.4 to 40.9.[ix] Yet over that timeframe, annual German GDP growth has averaged 1.2%, well ahead of Italy’s 0.2%.[x] If similar demographics didn’t hinder Germany’s economy, why would they be uniquely troublesome for Italy? They aren’t, in Fisher Investments UK’s review. Based on our research, other factors impact growth (e.g., a country’s economic sector and industry makeup, regulations, etc.) more than the population’s age.
Moreover, even if populations shrink, it won’t happen overnight. History has shown us that population shifts happen glacially, over the course of years or even decades. This is too slow to materially alter factors impacting corporate profits, which is what matters most to equities, in our opinion. Based on Fisher Investments UK’s reviews of history, equities look no further out than about 30 months into the future. Anything beyond that is unknowable, in our view.
The world will likely look very different over that timeframe, too. As populations change, so do societies and economies. Humanity adapts. At Fisher Investments UK, we think the technological and healthcare advances from the past 50 years have contributed to longer lives (e.g., many modern jobs are less physically taxing, allowing people to work for longer).[xi] Medical knowledge keeps growing, too, giving people more information on how to pursue behaviours that can extend their lifespans.
Human capital also isn’t growth’s only input, in Fisher Investments UK’s review. Capital, technology and productivity contribute to economic output, too. What if an enterprising firm, backed by a bank-issued business loan, invests in a technology that enhances labour productivity – and therefore requires fewer human employees? Despite a smaller, older workforce, the result could be higher profits, which we think equities care about most. We aren’t saying demographics don’t have meaningful societal effects, but from an investment perspective, they don’t change meaningfully enough in the short term to warrant portfolio decisions.
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This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
[i] Source: World Bank and FactSet, as of 12/7/2024. Statement based on 2023 US GDP in constant 2015 USD and MSCI World Index
[ii] Source: National Center for Health Statistics, as of 30/4/2024.
[iii] Ibid. Total fertility rate refers to the estimated number of children a woman would give birth to in her lifetime whilst the replacement rate is the number of births that would allow a generation to replace itself.
[iv] Source: OECD, as of 11/9/2023.
[v] Source: Bureau of Economic Analysis, as of 11/7/2024, and FactSet, as of 17/1/2024. Statement based on change in inflation-adjusted gross domestic product, 1970 – 2023 and MSCI USA Index returns with net dividends, in USD, Presented in US dollars. Currency fluctuations between the dollar and pound may result in higher or lower investment returns. An annualised return is the compound annual growth rate that would deliver the cumulative return over a given period.
[vi] Source: National Bureau of Economic Research and FactSet, as of 15/7/2024.
[vii] Source: OECD, as of 11/7/2024. Statement based on old-age dependency ratio for Italy and Germany, 2005 – 2023.
[viii] Ibid.
[ix] Ibid.
[x] Source: Eurostat, as of 11/7/2024.
[xi] Source: OECD, as of 15/7/2024.