As an investor, it is crucial to consider all factors that can impact equity performance in the long term. A recent analysis by JPMorgan highlights the significant effects of a graying population on the stock market. With people living longer and birth rates declining, the share of the old-age population (65 years or older) is expected to increase in the coming years. In the U.S., this cohort is projected to grow from 18.1% to 21.5%, while China is expected to see a more rapid increase from 14.6% to 21.6%.
According to JPMorgan strategist Alexander Wise, aging has a negative relationship with returns, earnings growth, and valuations. In fact, for every 1 percentage-point increase in the old age share of the population, there is a 0.92 percentage point decrease in the average annual return of the overall market. This decrease is primarily attributed to slower earnings growth and reduced valuations.
The impact of an aging population on earnings growth is significant, as it leads to slower workforce growth and ultimately lower economic growth. Additionally, there is evidence to suggest that aging can stifle innovation and productivity growth, further hampering earnings potential.
Equity valuations are also affected by an aging population, as national savings decline and bond yields rise. This, in turn, can lead to a decrease in stock allocations by older individuals, putting pressure on equity prices. However, one sector that stands to benefit from an aging population is healthcare. As the elderly spend more on healthcare, the sector is expected to experience faster earnings growth, resulting in higher returns.
In conclusion, it is important for investors to take into account demographic trends such as aging populations when making investment decisions. While these trends may have a negative impact on overall equity performance, there are opportunities to capitalize on specific sectors, such as healthcare, that are poised for growth in this changing landscape. Stay informed and make strategic investment choices to navigate the effects of a graying population on the stock market.