Sunday, April 8, 2012

Demographics, Dependency and PE ratios - An Introduction

Demographics is being examined by many as a principal driver of share prices. It also lends itself as a tool for sectoral analysis both in shares, business activities and in real estate.

Some look at it in terms of opportunities for growth, others as an increasing dependency ratio causing net dis-saving, some in terms of the health sector versus eg consumer discretionary spending, or in terms of new apartments versus existing homes for capital growth.

Seeking Alpha, a US based, on line finance blog for which I am an occasional contributor, runs as one of its seven macro themes a section on demographics. There editors choices of articles on demographics are at:,editors-picks,articles 

Future changes in age dependency is an important macro factor for estimating GDP growth and sectoral performance. Age dependency ratio is the ratio of dependents--people younger than 15 or older than 64--to the working-age population--those ages 15-64. Data are shown as the proportion of dependents per 100 working-age population.. (World Bank)

Broad investment principles based on demographics
The general broad bases of demographics are that:
1. A rising population is a better investment environment than a falling population
2. A population growing over the next say decade the number and share of 40 to 55 year olds is a better place to invest than one growing the number and share of over 70's. 40 to 55 year olds are the saving and investing age group so the money needed to be invested grows, putting upward pressure on prices. Their savings have to go somewhere.
3. Consumer durables and discretionary spending is more likely to grow where populations are growing the number and proportion of 18 to 35 year olds as that is the age of first high discretionary spending (18 to 28) and household formation ( 25 to 35)
4. Health care and apartments (over houses) are better investments in populations that are increasing the number and proportion of 65+ people as they downsize, dissave, seek more frequent and complex medical interventions, move to apartments as the net benefit of yards disappears and singular responsibility for maintenance becomes an increasing burden.
5. Manufacturnig jobs will move easily to low wage, reasonably educated, young, active populations in preference to places with older, dependent populations with decreasing average health, assuming government settings are favourable to the investment required.

Some notable macro demographic trends

1. China, as a result of its one child policy, will start to have significant increases in its dependency ratio, and a stabilisation of its total population number within 10 years.
2. India has a more favourable demographic profile than China.
3. US dependency ratio increases are expected to put downward pressure on PE ratio's until 2020.
4. Europe has a slow population growth, increasing dependency profile which reduces attractiveness of new investment in many sectors and promotes more of a cash cow approach to fund investment in more attractive markets.
5. Japan has an aging population, increasing dependency ratio and there is uncertainty as to how dis-saving will effect government bond prices as the ageing population sells or redeems bonds to fund living expenses and the yields required for new issues in an environment of the highest government debt to GDP among developed countries.

Australia and demographics
There are two major impacts on Australian investment from demographics. Internal demographics is one, the other is the demographics of our most accessible (geographically and politically) trading partners.

Australia is forecast to have an increasing dependency ratio under most population growth scenarios that have any semblance of likelihood. (A scenario which targeted a stable dependency ratio of that in 2000 would require exponential growth in population at levels not politically achievable). The difference between various highly possible scenarios of population growth is in the rate of increase of dependency over time.

As will be seen below, China and Japan will likely move to reducing populations and higher dependency ratios, but India and Indonesia have relatively high birth rates and existing large populations. If these tow countries had high growth/high develoment/mercantilist government policies with low political risk, they would be extremely important relationships for Australia given their geographic proximity.

The table below shows changes to the Dependency Ratio (DR) under 2 population scenarios. Even if high immigration is used to defer the rise in DR, it inevitably happens other than in such large population growth proposals that they would be viewed as being totally unrealistic by virtually the whole existing population.
(source of data:

. Population . DR .
Year Std Fraser Std Fraser
1998 18.8 18.8 0.73 0.73
2018 22 31.1 0.84 0.73
2038 23.9 43.9 1.04 0.83
2058 24.5 50 1.15 1.03

Birth Rates
Population growth is largely a function of birth rates.

207 Japan 1.39
205 Italy 1.4
202 Germany 1.41
187 China (Mainland) 1.55
164 Australia 1.77
143 United Kingdom 1.91
128 United States 2.06
108 Indonesia 2.23
81 India 2.58

This table (based on data from Wikipedia) highlights that 2 of Australia's largest trading partners, China and Japan have significantly below replacement birthrates. Two emerging neighbours have relatively high birthrates, Indonesia and India. Most of the large developed countries other than the US have below replacement birth rates, particularly in Europe. One of China's largest markets for manufactures is Europe. The implication for Australia is that the major takers of our commodities are all in significantly below replacement birthrates and three of the main market places for the sale of goods manufactured from our commodities also have below replacement birth rates. Europe, China and Japan (as China and Japan are both large exporters and large markets).

Dependency Ratios
Dependency ratios were relatively high in 1960 compared to in 2000. The higher dependency in 1960 was largely a result of baby boom children still being at school and many young adults having died during the second world war. Dependency ratios are forecast to increase significantly over the period to 2030 for most countries involved in the Second World War which had a post war baby boom.

Broadly speaking, the global low in dependency ratios was around 2000 and they are now tending to increase globally, but not yet in all countries. Japan Italy and Germany had increases in 2010 compared to 2000, while China attained the lowest dependency since 1960 of any of the major economies largely because of its one child policy.


1960 1970 1980 1990 2000 2010
Australia 63.3 59.2 53.6 49.7 49.6 48.0
China 77.3 77.3 68.5 51.4 48.1 38.2
Germany 48.8 58.5 51.7 44.7 47.0 51.2
India 77.6 79.6 75.9 71.7 63.8 55.1
Indonesia 77.0 86.8 80.7 67.3 54.7 48.3
Italy 52.7 55.7 55.3 45.8 48.3 52.5
Japan 56.0 45.3 48.4 43.4 46.6 56.4
United Kingdom 54.0 59.0 56.1 53.2 53.4 51.4
United States 66.7 61.8 51.2 52.0 51.0 49.6

(Source of data: World Bank download from


Demographics change very slowly, both in size of population and in age structure including DR. However they do impact and ought be borne in mind, particulalry by younger investors looking to harvest macro trends over time. For older investors, even recent retirees, they may still impact your total return over say 20 years of life expectancy. Government and Central Bank policies and investor fear and greed are likely to be much more influential in the shorter to medium term.

No comments:

Post a Comment