How Boomers Have Influenced Investments - Barclays Study Reveals

by Kim Walker 04 March 2010 14:49:26

Here's an interesting theory explaining the growth of equities in the past 30 years and why the future doesn't look so good. It's all down to us, the baby boomers.

Based on the Barclays Equity Gilts Study, reported here in the Financial Times, which compared cyclical price/earnings ratios on stocks since 1950 with the ratio of 35-54 year-olds in the population. Stock valuations became most extended just as the cohort of baby boomers were saving and producing most.

How did this turn into the later credit crisis? The mistakes that were made both in US monetary policy and in regulating US mortgage lending, were serious contributory factors. But again, demographic factors are a potent underlying force. Faced with the crash in equities, and with their retirements imminent, baby boomers would only have been expected to put money into bonds and other debt products, and thereby to help push interest rates. That is exactly what they did.

This led to a surge in the global appetite to place savings in debt instruments, which as Mr Bond points out is the same thing as a surge in the global appetite to lend.

The implications for the future are discomfiting. The proportion of 35-54 year-olds in the population will keep declining for another decade, while the imminent growth in the retired population should be very sharp.

That means equity valuations should keep coming down. The demographic shift that drove an equity bull market for two decades can be expected to drive a bear market for another two decades. That implies that this bear market has another decade to run.

Against this, equity valuations have already come down a lot. If companies keep producing decent profit growth, equities can still perform.

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