Why a shrinking population doesn't have to be the kiss of death for an economy or stock market

By Mark Hulbert

Investors are all wrong about demography, a new study finds. Keep that in mind when allocating your portfolio.

I'm taking issue with the widespread belief that the long-term fates of a country's economy and stock market are closely tied to the size of its population. Though demographic determinism has a long history, in recent decades it perhaps has been most widely associated in the investment arena with financial analyst and author Harry Dent.

A new study questions this determinism. Titled "Baby Busts and Growth Booms: Demographic Change and the Macroeconomy," the study began circulating in academic circles this summer. Its authors are Daron Acemoglu, David Autor and Keelan Beirne of MIT and Andrew Scott of the London Business School. The authors found that "lower birth rates are associated with higher growth in GDP per working-age adult" and that these two trends mostly cancel each other out - leaving a country's overall GDP largely unchanged as populations ebb and flow.

This finding may be good news for investors in countries whose populations are set to decline in coming decades. China's population in 2100 is projected to be more than 50% lower than today, for example, with Japan's 40% lower and Brazil's 23% smaller. If demography were destiny, then the long-term prospects of these countries' equities would be dismal.

Though the U.S. population is projected to grow modestly through 2100, the country is projected to fall from third to sixth place in a ranking of the world's most populous countries.

This new study will also be welcome news to investors in U.S. equities. Though the U.S. population is projected to grow modestly through 2100, the country is projected to fall from third to sixth place in a ranking of the world's most populous countries.

The study's authors effectively found that necessity is the mother of invention. When a country has a relative scarcity of younger workers, that country's technology sector rises to the occasion, resulting in "more labor-saving patents and growing high-tech activity." In addition, the authors found that countries with a relative shortage of workers experience faster growth in "Total Factor Productivity," which is the fraction of economic growth that can't be traced back to either labor or capital.

Many investors will react with incredulity, pointing to Japan as Exhibit A of why demography is destiny. The country's population was already plateauing by the late 1980s, when the Nikkei 225 (NIY00) stock average hit a peak that wasn't eclipsed for nearly four decades. The country's population today is lower than where it stood in the late 1980s and is projected to decline by nearly 40% more between now and the end of this century.

A glaring counterexample is South Korea. For many years it has been clear to demographers that its population was about to go over a cliff - yet its stock market has performed admirably. Its population hit a peak in 2020 and is projected to be 58% lower at the end of this century - even a bigger decline in percentage terms than in the case of China. And yet the iShares South Korea ETF EWY has held its own relative to the S&P 500 over the last couple of decades - even before this year, when South Korea's stock market has skyrocketed.

It is possible that other factors account for this new study's findings. Some have suggested that the bearish impact of a declining population can be avoided by an increasing share of women in the workforce and/or an increasingly educated workforce. But the researchers report that they found "little evidence" of support for these alternative explanations.

The investment implication of this new research is that long-term investors need not obsess about demographic projections when picking countries in which to invest. To illustrate, consider the accompanying chart that plots the relationship between the 20 largest developed countries' population growth over the 2000-25 period and the corresponding performance of their stock markets. Notice that the best-fit trend line is sloping slightly downward; though the angle of that slope is not a statistically significant difference from flat, the fact that it is downwardly sloping at all runs counter to what up until now has been the prevailing wisdom that an expanding population is a long-term economic positive.

The table below lists stocks of companies based outside the U.S. that currently are recommended by any of the investment newsletters monitored by my performance auditing firm. You'll notice that many of the companies are from countries with a projected population decline. If you had been avoiding such stocks because of what used to be the conventional wisdom, you can now consider each on its own merits rather than its country's demography - just as the newsletter editors already are doing.

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

-Mark Hulbert

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09-11-26 1309ET