Few took notice the last time the world began noticeably aging. That was in 2011 when the first baby boomers reached the age of 65, according to Macquarie, but nations and markets had their hands full fighting off the global financial crisis of 2008. Effects of the demographic shift will begin to appear more apparent this year, with consequences for growth, interest rates and equities due to global aging.
The effects of the global aging are poised to be particularly severe in the world’s major economies – the U.S., China, Europe and Japan, which together account for about 70% of the world’s GDP.
“Aging populations not only present headwinds for labor force growth, but also for productivity growth,” the bank said in a research note titled, “Macq-ro Insights: Demographics, Productivity and Neutral Rates.”
Demographic headwinds for labor force and productivity growth will keep real interest rates in major economies subdued, if not negative, while low yields will continue to underpin equity valuations allowing gains to persist despite elevated multiples, it added.
The global aging trend started in the early 1990s and accelerated since 2010. It is now poised to further intensify in the coming decade. The share of the working-age population that is over 65 will rise from 11% in 2015 to more than 15% in 2030. “To put the speed of the change into context, this amounts to a greater increase to the 65 & older share over a 15-year period than what occurred from 1950-2015,” Macquarie said.
According to Macquarie’s analysis, the U.S. – with labor force growth of 0.4% per annum – needs to create about 45,000 new jobs per month to overcome the demographic effects and maintain stable unemployment. The bank terms the number “breakeven jobs growth.” The dynamics are more severe elsewhere, the bank said. Labor forces in Japan are shrinking at a rate of 0.6% annually. In Europe, it is declining by 0.5% and in China by 0.1%.
The bank also warned of a sharp slide in a measure called “world GDP per capita adjusted breakeven jobs growth.” This number hovered around 2.5 million per month from 1990 to 2015, but is now sliding rapidly and will fall to about 1.5 million from 2020 to 2030, the bank said.
With labor force growth and productivity growth likely to be significantly impacted, what should investors watch out for?
Macquarie warns of neutral real interest rates going even lower. The bank predicts longer-run nominal Fed Fund rate of 1.75% vs. a consensus of 3%) and (2.3% vs. consensus 3.5% for 10-year treasury yield.
On equities, low yields should continue to underpin valuations allowing gains to persist despite elevated multiples, the bank said. It suggests two strategies to outperform the market. One set of stocks targets sensible dividend growth and the second aims for quality and sustainable growth. Examples of the former include Unilever (ULVR LN) and Vivendi (VIV FP); while Amazon (AMZN), Facebook (FB) and Fedex (FDX) represent the latter.
“Financial repression and low ten-year sovereign rates should lend support to equity market valuations,” the bank noted. “While multiples are elevated and the earnings growth outlook may be more moderate than prior decades (because of subdued global growth), low interest rates provide a silver lining.”