It is predicted that China’s stock market will take years, and even decades, to experience the effects of the country’s recent demographic data. The latest report from China revealed that for the seventh consecutive year in 2023, the number of births has declined. This decline, when combined with the number of deaths, is causing an acceleration in the overall population decline.
While an accelerating decline in population may seem concerning, it is incorrect to assume that this recent data will result in a sudden plunge in the Chinese stock market. While it is possible for Chinese equities to experience a decline in the upcoming months, it would not be solely due to the number of births from last year.
To better understand the relationship between demographics and the stock market, consider a key indicator known as the “MY Ratio,” which stands for “Middle-Young Ratio.” This ratio measures the proportion of a country’s middle-aged population (35-49) to its young-adult cohort (20-34). Numerous studies have found that a country’s stock market tends to perform better when its MY Ratio is rising, as opposed to when it is declining.
This research yields two important implications:
The Impact of Birth Rates on China’s Stock Market
In the realm of investing, it is essential to examine various factors that can influence the performance of a stock market. One such factor that has garnered significant attention is the birth rate of a country. Specifically, in the case of China, last year’s births are not expected to have an immediate effect on the MY Ratio or the stock market. However, as time progresses, the implications of the lower birth rate may become more apparent.
Looking ahead, it is estimated that it will take approximately 20 to 34 years for the reduced number of births from last year to have a negative impact on equities. This time frame aligns with when the size of China’s young-adult cohort will be considered in the MY Ratio calculation. It is important to note that a smaller denominator in this ratio translates to a larger ratio. Therefore, it can be concluded that last year’s lower birth rate should not adversely affect Chinese equities until around 2059.
At present, the MY Ratio indicates favorable prospects for Chinese stocks in the coming years. As depicted in the accompanying chart, China’s MY Ratio is expected to experience an upward trend. Based on this observation, Alejandra Grindal, Ned Davis Research’s chief economist, suggests that China’s equities are likely to benefit from positive tailwinds until 2031, when the MY ratio reaches its peak.
While demographics are not the sole determinant of the Chinese stock market’s long-term performance, they undeniably play a significant role. Understanding the direction in which demographics are heading is therefore crucial. For the foreseeable future, China’s demographics are poised to serve as a propelling force for its stock market rather than impeding its growth, contrary to what some may argue.
It is worth noting that there are other factors beyond demographics that can impact the Chinese stock market over time. Consequently, investors must consider a range of elements when assessing potential opportunities and risks in this market.
More: China-focused ETFs struggle amid fears of another regulatory ‘crackdown’
U.S. Recession: A Looming Threat
One of the significant risks that investors should watch out for is a potential recession in the United States. The economy is constantly subject to various factors such as market volatility, political uncertainties, and global events. A U.S. recession can have far-reaching consequences, affecting not only local markets but also having ripple effects worldwide.
China Growth Stalls: Implications for Investors
China, as a global economic powerhouse, plays a vital role in shaping the global market. However, an unexpected stall in China’s growth can have significant consequences for investors. Chinese economic policies, trade tensions, and shifting consumer behaviors can all contribute to a slowdown in China’s growth trajectory. Investors need to closely monitor these developments and adjust their strategies accordingly.
Additional Investing Risks to Consider
While U.S. recession and China’s growth are critical risks in 2024, other factors can also impact investors. These include geopolitical tensions, technological disruptions, regulatory changes, and environmental concerns. As investors, it is crucial to stay informed about these risks and continuously reevaluate investment decisions.
In conclusion, being aware of potential investing risks is essential for investors navigating the ever-changing financial landscape of 2024. Staying informed, adapting to new circumstances, and diversifying portfolios can help mitigate these risks and seize opportunities presented by a dynamic market environment.