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The US will have more people by 2100 – Russia and China will not. Why this is important for your stock portfolio now

Demography is destiny, the 19th centuryth Century, the French philosopher Auguste Comte is quoted. If so, then the long-term economic prospects for the United States are relatively good – at least compared to those of Russia and China.

That’s because the populations of these three countries are expected to take dramatically different paths later this century, as you can see in the chart below. That United Nations Population Division The US population is projected to be 31% larger in 2100 than in 2020, while Russia’s population is projected to be 14% smaller and China’s 26% smaller.

Differences of this magnitude should have a huge impact. As Loretta Mester, President and CEO of the Cleveland Federal Reserve Bank, put it on a 2017 conference in summarizing academic research on the impact of demographics on the economy: “Demographic change can affect the underlying growth rate of the economy, structural productivity growth, living standards, savings rates, consumption and investment; it can affect the long-term unemployment rate and the equilibrium interest rate, housing market developments and demand for financial assets.”

This is not to say that the relationship between population growth and economic growth is easy or straightforward. Just as a shrinking population can put pressure on economic growth, so too can a population that is growing too quickly. Productivity also plays an outsized role in whether population growth plays a positive economic role. In general, economists agree that in order to grow economies need an increasing base of workers and consumers – in other words, a larger population.

While the US population growth rate looks good compared to Russia and China, there is little to celebrate. At just 0.3% on an annualized basis, it’s barely enough to keep the US population from shrinking. Coinciding with this low growth rate is the rise of an aging population, which is putting increasing pressure on the working-age population to fund Social Security and other welfare programs.

But if America’s demographic fate isn’t exactly rosy, that of Russia and China is downright bleak. This fate has hardly escaped the leaders of these countries. It played a big part in China’s decisions over the past decade to move to a two-child and then a three-child family policy.

Regarding Russia, some have suggested that part of Russian President Vladimir Putin’s calculus in pursuing an otherwise disastrous invasion of Ukraine is an acute awareness of Russia’s eventual demographic decline. Describing Putin as “haunted” by this prospect, Times of London columnist Dominic Lawson has argued that “population decline is the engine of war”.

Impact on investments

While focusing on investments in the context of the horrors of the Russia-Ukraine war seems indecent, such a focus provides an additional perspective on the significant long-term impact of demographics. Consider the Japanese stock market, which has faced significant demographic headwinds for several decades. As the chart above shows, these headwinds will continue for many decades to come; Japan’s population is projected to be 40% lower in 2100 than in 2020.

Note carefully that population size is not helpful for stock market timing — not just over the short-term, but over the longer term, up to a decade or two. Researchers have found that over periods of this length, the stock market seems more responsive to whether the working-age population is growing relative to the very young or very old cohorts. This is one of the reasons why even in a country facing a century of demographic decline, a decade or two-long bull market can occur.

Population growth becomes relevant for investment horizons longer than a decade or two – for example, investing for retirement. Perhaps the most obvious implication for investment is the importance of international diversification into less developed economies. Almost all of the world’s net population growth through the end of the 21st century will be concentrated in countries currently considered less developed. The United Nations Population Division projects that the total population of these countries will be 48% higher in 2100 than in 2020, in contrast to no net change for the more developed countries.

Individual regions will go through even more different population growth paths. The United Nations predicts that Africa’s population will be 231% higher in 2100 than in 2020. Asia, on the other hand, will only see a 2% increase over this period, while Europe’s population will shrink.

While acknowledging that the relationship between population growth and the economy and stock markets is complex and at times opaque, it is clear that concentrating your stock portfolios on the US in particular, or more generally on the world’s most developed countries at present, some of them overlooked are the most profitable investments of the next century. After all, every “more developed” country was a “less developed” at some point in the past.

According to the Credit Suisse Global Investment Returns Yearbook 2022For example, Finland switched from the emerging category to the developed category in 1932. Japan made the switch in 1967; Spain 1974; Hong Kong in 1977, Singapore in 1980, and Israel in 2010. It’s a good bet that many more countries will undergo a similar degree sometime this century, and it would be short-sighted to miss them.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: A majority of workers have confidence in Social Security. Should you?

Also read: Saving for retirement? These are the only two mutual funds you’ll ever need

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Brian Lowry

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