Are you a baby boomer???

My turn, my turn…..seems like it is quite “fashionable” to be the voice of ‘doom and gloom’ so heck, why not join the crowd I say!!! [grin] So here’s my little contribution; and one which is particularly close to my heart, as I too am a BB (only just!!) [tongue]

FOLLOW THE MONEY
Publication: Australian Financial Review
Author: David Bassanese
Date: 13/11/2004

History suggests markets could take a tumble when retiring baby boomers start selling off their nest eggs.

The sharemarket is surging and it seems a great time to invest, but there’s a demographic time bomb ticking that is set to ignite in six years. In 2010 the oldest baby boomer will retire, to be followed by a swathe of retirees over the following few decades.

With that shift, history’s greatest bulge in financial asset buyers, who have underpinned a solid bull market since the early 1980s, will not only stop buying but will start selling. International studies suggest that could
weigh on asset price returns for the generations following in their wake, making it harder to save for retirement.

And research by The Australian Financial Review finds that the international linkages between demography and sharemarkets hold quite strongly in Australia.

Since 1983, the proportion of Australians in the prime saving years of their life those aged 40 to 65 years has increased from 33 per cent to 46 per cent. A similar trend has been apparent in the United States.

As baby boomers have aged and become big savers, they have underpinned a strong demand for financial assets, not just in Australia but across most of the developed world.

As the Organisation for Economic Co-operation and Development noted in its March Financial Market Trends report, “During the 1990s, financial markets in general and equity markets in particular may have benefited from large inflows into pension funds and other institutionalised forms of saving. These inflows reflected to a considerable extent saving for retirement by baby-boom generations. These baby-boom generations are expected to start to move into retirement after 2010.”

According to demographic projections by the Australian Bureau of Statistics, the share of 40- to 64-year-olds relative to the rest of the population will peak at about 50 per cent over the next decade, after which it will start falling, reaching 45 per cent by 2051.

If history and international studies are any guide, any downward movement promises to have a dampening effect on local house prices and sharemarkets.

In a study in its September World Economic Outlook, “How Will Population Aging Affect Financial Markets?” the International Monetary Fund noted that “during the postwar period, real stock prices in the United States have indeed been positively associated with the relative importance of the population in prime saving years.”

The ratio of 40- to 64-year-olds relative to the rest of the US population increased through much of the first half of the last century, which the IMF argues happened to be associated with the postwar stockmarket boom of the 1950s and ’60s.

Due to the postwar baby boom, the prime savers’ population share started falling from the late 1940s until the mid-1980s and was associated with more troublesome equity markets in the 1970s and early 1980s.

But as baby boomers moved into the prime saving group from the mid-1980s, the US stockmarket enjoyed an impressive bull run.

The United States was not alone. The IMF cites a study of 14 developed economies that reveals similar linkages over time.

As the world’s biggest economy, America’s stockmarket helps drive stockmarkets around the world. But official US projections have the population aged 40 to 64 years falling from about 50 per cent of the population today to less than 40 per cent by 2050.

The Australian Financial Review has recreated the IMF long-term analysis using Australian data on share prices and demography. The results are even more sobering. It shows an even closer relationship between long-run sharemarket performance and population ageing in Australia than in the United States.

For example, between 1901 and 1945, the ratio of 40- to 64-year-olds relative to the rest of the population increased from 22 per cent to almost 40 per cent and was associated with a broad uptrend in real stock prices until the late 1930s (even allowing for the Great Depression).

But with the increase in the birth rate after World War II, the proportion of prime savers eased over the next few decades, bottoming at about 33 per cent in the early 1980s.

The period between World War II and the early 1970s has been dubbed the “golden years” of economic growth, and the sharemarket did enjoy its fair share of cyclical booms over this period. But across the broader sweep of time, real share prices still ended up slightly lower in the early 1980s than they were in the late 1930s.

Then came the great bull market of the last two decades. Australia’s real share prices have tripled over this period. Over this time the prime saver share of the population relative to the rest increased from one-third to almost one-half.

The good news is that demographic projections suggest the prime saver ratio in Australia and in key countries such as the US will keep increasing over the next six years or so. That should provide good demographic support to the market for those saving furiously for their looming retirement. But for others further down the age scale, they’ll be buying assets while the swelling ranks of retirees are selling.

Before young investors despair at the thought of building up a decent saving nest egg, however, the IMF holds out some hope.

For starters, it could all just be a coincidence. The IMF study noted that factors other than demographics could explain stockmarket cycles over recent decades: a post-World War II economic boom and the subsequent depressing effect of oil price shocks during the 1970s. One could also argue that the return to low inflation and the IT revolution helped kick-start the equity boom from the mid-1980s.

What’s more, the apparently robust international links between stocks and demographics may merely reflect common global shocks, such as the Great Depression and World War II, which affected population and economic performance in many countries at the same time.

And the OECD study in March suggested retirees may not be big sellers of financial assets due to “bequest motives and lifetime uncertainty”. But whether a hard-pressed social security system leaves them the right to retain accumulated assets remains to be seen.

While many will hang onto their investment for a time, slowly but surely some of their nest eggs will find its way back onto the market. And even if the selling is not large, markets will miss the buying spree from history’s greatest group of financial asset buyers.

As the IMF could not help but conclude, “The empirical and theoretical strands of the literature suggest that stock prices could move against the baby boomers as they retire.”

But it’s not just a problem for baby boomers; it also affects those who follow.