Fisher Investments Canada’s take on demographics’ stock market impact

Open this photo in gallery:

Earnings are a function of the economic cycle – the regular ups and downs that occur within this period – whereas population trends can take decades to develop

Do aging populations portend economic decay? Commentators we follow often argue older populations mean fewer consumers, smaller workforces, less productivity and greater fiscal burdens for governments – all scenarios they allege will knock economic growth and, by extension, stock prices. Yet Fisher Investments Canada’s review of population trends’ economic impact shows these fears make too much of demographics and aging.

Fisher Investments Canada’s review of population trends shows they move glacially – over many years, even generations. According to the United Nations (UN), America’s birth rate hovered over 20 per 1,000 inhabitants in the 1950s.1 This was a postwar phenomenon called the baby boom and it has fed many demographic fears we see, as that period’s birth rates are unmatched. By 1969, America’s birth rate had declined to 17.5 per 1,000 inhabitants, and it fell below 15 by the mid-1970s.2 It then rebounded some in the 1980s and 1990s before declining again. Now the rate is near 10.3 There are many takeaways from this, in our view. While there is a general downward trend, the path has been volatile – so linear extrapolations of the latest birth rate seem faulty to us. Yet, in our experience, most population projections use straight-line math, which can’t account for potential future changes such as immigration. The UN has also acknowledged countries often misreport numbers and undercount or underreport the effects of vital events.4

But according to Fisher Investments Canada’s review of those long-term trends, there is little evidence they sway economic growth or market conditions. Consider that, in the period described above, U.S. birth rates basically halved.5 Yet the country’s economy overall boomed alongside stock markets, with cycles of growth and contraction, bull markets and bear markets.6 This highlights two points, in our view: One, population trends didn’t dictate overall economic direction; and two, we think the underlying cycles show other factors mean more to markets. According to Fisher Investments Canada’s research, stocks look about three to 30 months out, focusing on how corporate earnings are likely to evolve. We think earnings are a function of the economic cycle – the regular ups and downs that occur within this period – whereas population trends, as demonstrated above, can take decades to develop. Or consider Exhibit 1, which ranks all 23 MSCI World Index constituent countries by population growth in the most recent 10-year span on record. If population trends mattered materially, you might expect faster-growing populations to do better over time. But as you can see, there is no pattern between equity market performance and demographic data.

Exhibit 1: MSCI World Index Constituents’ Population Growth and Stock Market Returns

Open this photo in gallery:

Source: World Data Info and FactSet, as of 14/4/2023. Cumulative population growth and cumulative MSCI Index returns with net dividends in EUR, 31/12/2011 – 31/12/2021.

If a population does grey, Fisher Investments Canada’s review of government policy shows politicians can act, and historically have. For example, countries can adjust their tax system if necessary to continue funding a larger pension burden. Alternatively, politicians can adjust the retirement age as France recently did.7 That can lead to a painful transition and frustrate those affected, but doing so can ease stress on the pension system. We have seen governments weigh other options to fund pensions, including tweaking cost-of-living adjustments to payments and means-testing (phasing out those with higher non-pension income from benefits). We aren’t passing judgment on any, but they are available tools.

Furthermore, as economies have become more services- and knowledge-based, older generations can continue contributing to the workforce, and Fisher Investments Canada thinks their experience can prove valuable.8 Consider that, since 2005, the number of people aged 55 to 64 in Europe’s workforce has increased from 37.2 million to 47.8 million.9 And then there are technological advancements, which have boosted productivity and driven up per-capita economic growth.10 American industrialist Henry Ford’s assembly line in the early 20th century is a classic example as it cut car production from half a day to just over one-and-half hours.11 Artificial intelligence is a more modern example, as developments in this field have fuelled advancements in health care, transportation, manufacturing and agriculture.12 Investors are also deploying billions of dollars to fund innovation, and some of that investment targets serving older people, with such things as medication and devices to improve quality of life. In our view, that is a positive economic return.

Furthermore, an older population can and still does consume goods and services, from spending on medical bills to treating their families with meals or vacations. Fisher Investments Canada thinks this is a positive economic contribution, regardless of whether it is sourced from a government pension account or personal savings. In our view, what commentators frame as a challenge appears to be an investing opportunity and the potential for economic growth potential – not the lack thereof.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalised investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

Fisher Investments Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada and as Fisher Investments.

Advertising feature produced by Fisher Investments Canada. The Globe’s editorial department was not involved.