Last week I wrote about trends in emerging markets. This week I stumbled upon an article from The Economist that discusses the demographic challenges facing developed markets – an aging population. This is problem facing many developed economies including the US, but Japan, Germany, and Italy in particular.
First it’s best to describe the basic assumption associated with age groups and asset purchasing. In general, working aged people buy assets and retiring people sell assets. The former pushes prices up and the latter pushes prices down. The article has some research that substantiates this:
- A paper by Elod Takats for BIS looked at home prices in 22 advanced economies. He found that a 1% increase in old-age dependency ration (old people/working age people) was associated with a .66% drop in real home prices.
- The San Francisco Fed found that there has been a high correlation between the ratio of Americans aged 40-49 and those aged 60-69 and the market’s P/E ratio.
To me this indicates there could be some serious problems facing asset markets in developed economies; however, I don’t think it spells certain doom:
- Markets have likely discounted this.
- Elderly people may wind up working longer.
- More liberal immigration laws can help lower the average age.
- Monetary and fiscal policies can help address the problem of an aging a population.
Ultimately I think an aging population will have an effect on asset markets; however, I don’t think it will be severe.
Where is the US? In the short-term we appear to be aging; however, by 2025 we should have a strong rebound in working-aged individuals.
