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Why the aging developed country population affects your portfolio

Rick Rieder of BlackRock

3 big-picture shifts you should pay attention to (Part 2 of 5)

(Continued from Part 1)

The developed world’s aging populations. Populations are rapidly aging in most developed countries (URTH). The proportion of the developed market population older than 60 years came in at roughly 15% in 1975, but it’s expected to double to 30% by 2025, according to United Nations estimates.

Market Realist – With no paradigm shifts in immigration policies and no changes in retirement age, this could mean a slowdown in growth for most developed nations. The graph above shows you the proportion of people above 65 years of age in both developing and developed nations from 1975 to 2013. As you can see, the European Union, Canada, and the United States have experienced the highest rise in proportion of people over 65 years old.

Demographic shifts of this kind can stress an economy because it’s generally the working-age population (say, those ages 20 to 59) that delivers both gross domestic product (or GDP) growth and capital market appreciation, while the tails of the population distribution (children and retirees) tend to be dependent on others and have less of an impact on growth in the economy or markets.

Market Realist – An aging population usually implies slower growth and less demand for capital. This consequently suggests lower interest rates. Equity multiples too are likely to remain low compared to historical averages for slow-growth nations. This means the premiums developed markets enjoy are likely to lessen over time.

Though U.S. demographics are better than other developed nations’, they’re worse than developing countries like Brazil, India, the Philippines, and Indonesia. The U.S. also has to deal with its social security and entitlement programs, which should pressure the economy as the population ages.

In addition, as more and more people reach retirement age, labor forces typically shrink, and greater numbers of people take advantage of entitlement programs. In combination with developed countries’ already high sovereign debt levels, this is likely to challenge the ability of many governments to maintain entitlement spending (i.e. programs like Social Security).

Market Realist – Under this demographic situation, for long-term gains, investors are likely to be better off investing in developing nations like Brazil (EWZ), India (EPI), and China (FXI) instead of developed markets (VEA). Japan (EWJ), with 25% of its population already above 65 years of age in 2013, won’t fare well versus countries with younger populations.

Read on to the next part of this series to find out the next big-picture change affecting markets.

Continue to Part 3

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