"The Population Conundrum"
Original Article by Norma Cohen of the Financial Times
Cohen covers how demography may be the most significant drive of returns that occurred as the financial crisis unraveled.
The 1982-1999 bull market was driven by the post-war baby boom, which created a boom of working-age adults and the core savings group. Cohen states that with current trends in birth rates and life expectancy, a growing body of economic research suggests that the rates of stock market growth enjoyed by investors during those decades are gone for at least a generation, possibly even forever.
Demography is key to understanding why such times may never return, Cohen comments. In the last forty years, there was an unprecedented rise in life expectancy and decline in birth rates. Evidence suggests that ageing populations will weigh on economic growth and asset values for years, if not decades.
Populations in most major industrialised nations are ageing rapidly, which means those saving for retirement is diminishing. As the baby boom generation grows older, its investment preferences tend to favour safer assets, i.e. bonds. As a result, this is pushing banks and insurers into "safer" assets, and is driving yields on those assets lower, Cohen explains.
The change in life-expectancy and working-age is confronting policy makers with "unpalatable choices about how to pay for pensions and healthcare in economies where workers simply cannot provide enough tax revenue to maintain decent standards for those too old to work," Cohen explains.