Will share prices boom as a generation retires?
What kind of effect will retiring ‘Baby Boomers’ have on share prices?
The “Baby Boomers” (those born from 1946 to 1961) are approaching retirement age. With post retirement typically identified as “the consumption phase” of life, will Boomers sell to finance their consumption?
Several factors are at play here: Baby Boomers are retiring well past the former retirement age of 60 and they are spending more than previous generations (much less “saving of the kids’ inheritance”). But it’s their sheer numbers magnifying the question of “What will happen when they all retire? Will they all sell their shares at once, pressure stock prices down and ‘bust’ the market? Or will they hang onto their shares? Will prices soar?”
It’s an even more intriguing question because over half the Australian population owns shares.
Opinions abound. Some say it will see meltdown, others see little evidence of retirees reducing equity exposure.
Rising prices
In his recent paper “Demographic Change and Asset Prices”, Robin Brooks, from the International Monetary Fund’s Asia and Pacific Department, found empirical evidence did not point to a strong historical link between demographics and financial markets.
Indeed, in countries with strong household equity market participation — such as Australia, New Zealand, Canada, the UK and the USA — real financial asset prices may actually rise as the populations continue to age. This finding, Brooks said, “underscores that historical evidence provides little support for the hypothesis that asset prices and returns will fall abruptly when the Baby Boomers retire”.
In North America, individuals hold more than 75% of equities. The top 10% (in wealth terms), don’t really have to rely on selling equities to fund their lifestyle as they grow older. And it’s an important market to watch: with Baby Boomers representing some 25% of the US population, forecasts are for them to progressively retire over the next 20-odd years. (Again, a huge impact of the changing pattern of retirement.)
Economic researchers from Chatham House (one of the world’s leading organisations for analysing international issues) say that given current, quite extreme, demographic trends in several countries, the life-cycle hypothesis predicts that population ageing will result first in a pre-retirement savings boom, to be followed by a savings-rate decline as older households begin to draw down their retirement funds.
Asset meltdown
This has given rise to the “asset meltdown hypothesis” theory, whereby retiring Baby Boomers will sell off assets they have accumulated during their prime working years to support retirement consumption.
E. Philip Davis and Christine Li, from Brunel University (UK), are a couple of the few economic researchers to “suggest a more severe downturn is possible” when the Baby Boomers retire. This, they believe, underlines “the potential market risks associated with sole reliance on fully funded pension schemes”.
However, most researchers believe the “meltdown” is a worst-case scenario. Mainly because consumers typically dispose of assets at a less rapid rate than this simplified life-cycle model suggests.
Chatham House research says while changes in household portfolio allocation are unlikely to result in an “asset meltdown”, they can have important effects on demand for different kinds of assets. For instance, people become increasingly risk-averse with age and tend to switch to safer assets. This is why some researchers believe there could be significant implications for asset prices as Baby Boomers switch from stocks to bonds on retirement.
Interestingly, James Poterba, head of MIT’s Economics Department (USA), found in two studies that the ageing population has little effect on the demand for assets or stock returns, with some evidence suggesting a rise in stock prices.
Such a rise would aid Boomers looking to fund legacies. In a speech in the USA last year, Daniel Wheeler, Director of Global Financial Advisor Services with Dimensional Fund Advisors, said anecdotally, some Baby Boomers had a desire to “give something back” — even if that’s a legacy after their death. To fund that, he said, equities are most likely to be held.
Globalisation
Then there’s the effect of globalisation.
Liberalised financial systems have rapidly integrated financial markets around the world. And growing economies and the wealth of emerging markets, says Chatham House, might offset the “meltdown” theory.
Wheeler also pointed out that some countries have increased the amount of pension money that can be allocated to foreign equities.
Add to that, is a company listed on the ASX or New York Stock Exchange domestic or foreign? (Answer? It depends, says Wheeler.) Companies looking overseas for capital — particularly those in the emerging markets of China and India — will seek increasing exposure to equity markets.
It makes sense to question the effect on the stock market of so much comment on the possible effects of the Baby Boomers retiring. Basically, the answer is “it’s reflected in the prices”. Such an answer also shows that it’s more important to be disciplined in stock market investments than try to “pick the ideal timing”.
Slow and steady wins
What will remain unchanged is that as economies grow, companies need capital. Investors — those providing that capital — will get a return on it. Changes in your portfolio should always be a considered part of your overall financial plan.
Tags: Baby boomer, investment