Key Points
- The graying population is going to have a long-term effect on equity performance, according to an analysis by JPMorgan.
- People are living longer and birth rates are down.
The graying population is going to have a long-term effect on equity performance, according to an analysis by JPMorgan. People are living longer and birth rates are down. For instance, the share of the old-age population — those 65 years or older — in the U.S. is expected to grow to 21.5% from 18.1% over the next decade, the bank said. China’s growth is expected to be more rapid, with its older cohort increasing to 21.6% from 14.6% during that time, per the analysis. That is not great news for the stock market, according to JPMorgan strategist Alexander Wise. “Across the board, we find that aging has a negative relationship with returns, earnings growth, and valuations,” he wrote in an Aug. 30 note. Over a 10-year period, a 1 percentage-point increase in the old age share of the population is associated with a 0.92 percentage point decrease in the average annual return of the overall market in an unweighted sample, Wise said. Slower earnings growth and reduced valuations both accounted for this effect. The bank also ran a weighted sample by population size based on a hypothesis that a demographic change will be relatively more important in the largest markets, such as the U.S. “The results are generally quite similar, which suggests that the effect of domestic aging may be quite uniform across countries, large and small alike,” Wise said. Slower earnings growth An aging population affects earnings growth in numerous ways, including slower workforce growth, which reduces economic growth, Wise said. For each 1 percentage-point increase in the old age share of the population, growth per worker drops 0.58 percentage points, the analysis found. There is also evidence that it can lower innovation and productivity growth, Wise pointed out. Reducing valuations The effect is also seen in equity valuations. The aging population reduces national savings as the elderly take distributions from their retirement savings, selling their holdings and thereby raising bond yields, Wise said. Bond yields and prices move inversely to each other. In addition, people tend to reduce their stock allocations as they age, which should also pressure equity prices, Wise said. “Population aging may also lead to lower earnings growth expectations, justifying cheaper valuations,” he added. The beneficiary Since the elderly spend more on health care, the sector is poised to benefit as the population ages, Wise said. “We find a clear positive relationship between aging and excess returns on the sector, driven entirely by faster earnings growth,” he said. A 1 percentage-point increase in the old age share of the population over a 10-year period is associated with a 0.85 percentage-point increase in the average annual return on the health-care sector relative to the overall market, Wise noted.
