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Curatia Analysis for Wed, Jun 12

Market Demographics: How Aging Populations Are Quietly Reshaping Global Financial Markets

In electronified markets where trades trip the microwave fantastic at microsecond intervals, the glacial tectonics of market demography rarely rate a mention.

But like the forces that have inexorably moved mountains, raised islands, and sketched the vast oceans that trace our world, age demographics are wielding irresistible influence in shaping the fortunes of the sectors, geographies, and asset classes that comprise global financial markets.

Sectors & Geographies

Aging populations are becoming a fixture of the developed world. By 2040, the global population of those aged 65 and over will double relative to 2015 levels. In developed countries, senior citizens outnumber those under the age of 15 for the first time ever.

Those dynamics have famously buoyed the health care sector. But they’ve also created less obvious sector investing opportunities. China, for instance, has invested heavily in robots to address the growing social challenge of caring for its aging citizenry. Changing age demographics have made luxury travel and senior housing high-growth niches.

In Europe, meanwhile, aging has blunted economic growth as retirees have left the workforce, holding down interest rates and dampening loan demand — a trend that’s stifled the continent’s banking sector. Forward P/E ratios in European banking have dropped 20% since 2009 — the only sector in which they’ve failed to increase by at least 30%.

A decade of stagnant growth has fueled concerns over Europe’s “Japanification.” Since 1990, the S&P 500 has soared nearly 800%, leaving Europe (+300%) and Japan (-6%) far behind.

Those headline stats reflect a decoupling of US and European financial markets as aging European populations come to more closely mirror those in Asia’s two largest economies (China, Japan).

Asset Classes

The impacts of aging extend beyond the familiar investing categories of sectors and geographies and into asset classes. As developed nations’ populations age, they’re following the investing orthodoxy of shifting their portfolio allocations from stocks to bonds, tilting market activity away from publicly traded equities and into fixed income.

And because their accumulated wealth makes them more likely to be accredited investors, aging citizens of developed countries have both benefited from and contributed to the turn toward private capital markets.

In the US, accredited investor thresholds haven’t changed in more than three decades — a span over which the number of accredited investing households has risen tenfold.

Aging populations could also be dampening volatility in stock markets as investors facing fewer market cycles before retirement pare their risk profiles in accordance with investing best practices.

Youth Movement

Public stock markets are also getting squeezed at the low end of the age spectrum. Millennials have increasingly spurned a stock market they grew up watching implode in favor of crypto, cannabis, or even cash.

While the media has emphasized the role of socially conscious pension funds in spurring asset managers’ ESG push, that movement is also a bid to lure millennials back into the orbit of equity markets.

77% of high-net-worth millennials “currently own or are interested in so-called impact investments,” per a 2018 BAML survey. A wave of fintech startups is seeking to meet that demand by building social-investing apps.

More broadly, changing age demographics arguably pose a creeping threat to both economic growth and enthusiasm for equity investing in developed markets. While those dynamics are slow-developing, they are proving equally irresistible, making a strong case for consideration of age demographics in investing as well as strategic decision-making for finance firms.