An interesting Economics Focus column in this week’s Economist discusses the link between aging and asset prices. It says, in a nutshell, that aging depresses asset prices as the young buy more assets for retirement (driving prices up), and the old sell them (driving prices down).
The theory behind the link between ageing and asset prices is outlined in a recent working paper by Elod Takats of the Bank for International Settlements (BIS). In simple terms, the young and middle-aged save for old age by buying assets, often with borrowed money; the old sell them to pay for retirement. As the working-age population rises—as it did, for instance, after the baby boom—asset prices rocket because of increased demand. As baby-boomers reach retirement, the reverse may happen. [link]
This is particularly relevant for Japan with its aging population, and has been brought into focus by a Japanese official — the deputy governor of the Bank of Japan. I suppose that there is also an element of risk-aversion in there somewhere. But the story does not end there.
A model developed at the Federal Reserve Bank of San Francisco finds that since 1954 there has been a high correlation between the ratio of Americans aged 40-49 to those aged 60-69, and the price/earnings ratio of the stockmarket. The implication of this relationship for share prices in the future is bearish, it says. Based on standard demographic and earnings assumptions, the San Francisco Fed’s model suggests share prices will fall by 13% between 2010-21. [link]
This is depressing. Does this mean a move towards emerging markets? India’s population has been touted to be young for some time now, though we cannot say the same for China. Not sure about the rest of the BRICS. The Economist asks us to take the results with a grain of salt, though:
Such estimates should be treated with caution. Ageing, at least in the short term, is fairly predictable, so markets may have already discounted its impact on asset prices. Mr Takats draws attention to the fact that elderly people may end up working longer, which would reduce the pressure to sell their assets. [link]
Though the article itself doesn’t end on that (somewhat) positive note, I think I will. The economy is depressing enough — do we really need more grief?