I recently came across an article on Seeking Alpha by The Statistical Investor entitled “Demographics Are Destiny: World Population Trends“. The article begins: “As they say, demographics is destiny. Just ask Japan. The longer your investment horizon, the more exposed you are to demographic trends.” The author continues with what we might call “conventional wisdom” – ideas that are so well accepted that they go unquestioned: “Population trends are important because they help us to estimate a growth rate in our valuations. Putting a valuation on growth is probably one of the most important tasks in valuing a company.” While the author does acknowledge that “population growth does not guarantee significant economic growth,” he goes on to state that assuming productivity growth continues in countries with growing populations “you can expect sizable returns from companies that operate there [in those countries].” While it’s true that population growth and productivity determine the rate of growth in a country’s economy, the conventional wisdom that faster-growing economies lead to higher investment returns isn’t true. What’s more troubling is that there isn’t any logic to that idea. Let’s explore why economic growth rates and stock returns have actually been negatively, not positively correlated.
Read the rest of the article on Seeking Alpha.