A headwind for bonds

A sea change in the age structure of several major economies will have profound implications for markets.

A wide array of factors affect asset prices over the longer term, but demographics are "among the most powerful", says the latest annual Equity Gilt Study from Barclays. That implies that the coming sea change in the age structure of several major economies will have had "potentially profound" implications for markets.

The segment of the population that saves the most into stocks and bonds is the "mature worker", aged around 40-64. Meanwhile, the elderly are more likely to sell their holdings and run down their savings. Since 1980, a steady rise in the proportion of elderly people has been offset by an increase in mature workers worldwide. This has led to a "global savings glut", buoying asset markets.

But now the tide is turning. The study looks at major economies, including Europe, China, Japan and America. The proportion of mature workers is flattening out or declining, and that of elderly spenders is climbing. The upshot is that as the gap between these two categories narrows over the next two decades, "the age structure is projected to become markedly less savings-friendly".

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Japan has blazed the trail. The savings rate there fell as the working population dwindled in the 1990s. This did not have much impact on Japanese asset prices, which were propped up by savings from the rest of the world. But now that the main developed economies and China are all set for a demographic reversal, the savings glut is set to be soaked up.

732-bonds

The outcome may fall far short of these figures, but even declines of half this size would add up to "a substantial dislocation of the balance between savings and investment".

All this implies a growing long-term headwind for equities. But it constitutes a bigger threat to bonds, which are historically absurdly overpriced, as we noted last week. The link between demographics and asset prices "seems quite inconsistent with market pricing of very low or negative five-year and even ten-year" bonds, as the report puts it.

The ageing population points to lower prices, and higher yields and interest rates, and is therefore another potential pin that could burst the bond bubble.

Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.