Of all the mega-trends that are routinely discussed by the financial media such as emerging markets or the commodity supercycle, the one concerning ageing populations gets relatively less attention.

This is surprising, because as one demographics expert argues, it is probably the most powerful trend of all – especially in the context of market valuations.  

For instance, it means the days of getting an expected annual average 7% return from the stock market just by holding an equity index over the very long-term are probably gone for good and the commodity supercycle, in terms of oil at least, is likely to have run its course. On the other hand this 'new normal' of uncertainty and volatility should be supportive of gilts as investors seek the sanctuary of relative safe havens, even at the expense of very low returns.

“Demographics drive demand,” says Paul Hodges, chairman of UK-based strategic consultancy, IeC. “Western baby boomers have created the largest and wealthiest generation that has ever lived. But since 2001 they have been entering the age 55+ cohort.” He says this highly significant demographic shift is bringing about fundamental changes in terms of stock market performance and the economic environment. Economic growth tends to drive corporate earnings and it's those numbers and future expectations of them, which influence long-term valuations. As the world transitions towards this new normal it is likely to lead to lower equity valuations, says Hodges who has advised a number of major companiesand investment banks on demographic trends.

Hodges argues that deleveraging, austerity and the woes of the financial sector are simply the symptoms of the real issue facing us. For him, their cause is the result of the ageing of the Western population

Seeking new explanations

As economists and policy makers struggle to find explanations for continued sub-normal GDP growth there are some who are beginning to examine the demographic argument as a possible cause. After all, over three years of ultra-low interest rates and quantitative easing have not brought about sustained economic recovery.

In June financial services group Standard Life published a report looking at the demographic perspective and argued that differences across age groups can have substantial influences on asset prices and inflation levels. It added that the size and differences across various age cohorts leads to divergences in the supply and demand for financial…

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