Demographics correctly called an economic turning point in 2008. Andrew Oxlade looks ahead for further guidance.

By Andrew Oxlade, Personal Finance Editor

The Telegraph
Friday 7 June 2013

It's sex that drives the economy, or at least the timing of it. That's one theory on how the collective wealth of nations is determined. Pared down to its simplest, the ratio between the number of thirty and fortysomethings versus the over-65s will have an overwhelming effect on the economy and company profits.

Harry Dent, a controversial Florida-based wealth manager, has gone further. For decades, he has plotted the progress of stock markets, with inflation stripped out, against the proportion of 46 and 47-year-olds in the population. He claimed that a direct correlation existed in Japan and the United States. This is the age of peak spending, the stage of life when the children fly the nest and dad finally splashes out on that Harley-Davidson. Wealth is spent and not stored and the economy flourishes.

I first wrote about this theory in 2002. It predicted that the UK and the US property and stock markets would crash in 2008 following a peak in the number of 46-year-olds, because the postwar baby boom reached its zenith around 1960. Some of the other forecasts by Mr Dent were wide of the mark but the essence of the theory resonates and served as an unnerving guide to today's woes.

The fear, now widely reported, is that we're following the path of Japan, which entered a two-decade-long slump in 1990. (Our demographic shape is similar to Japan's but with a 20-year lag.) As in Japan two decades ago, our population pendulum has begun to swing away from having a big chunk of those spending (too much of it on credit) and paying taxes to a huge number of low-spending pensioners taking a well‑earned rest.

So what next? If the theory is right, Japan would serve as a guide to the future. In that future, the value of gilts, UK government debt, continues to rise, property prices fall and stock markets endure a decade of steady decline. ......

...... Baby boomers will remember the ill-effects of stagflation on the British economy of the Seventies, when inflation took hold but the economy stagnated. Wealth not only stops growing but it gets devoured by price rises. ......

...... Others are more sanguine. Alan Steel of Alan Steel Asset Management sees an "echo baby boom" - the babies of the boomers - as the saviour. They will soon start to move from their twenties to their thirties and ease the pressure. He doesn't believe Britain will follow Japan. "Things are different here," he said. "It's an open society with immigration."

Theories, of course, are dangerous for investors. The wiser money discounts the crystal ball predictions but loosely backs the demographic trend. Namely, make sure some of the shares in your portfolio could benefit from the ageing population - drugs companies finding or selling cures for ailments or maybe insurance companies offering annuities. Some demographic investors, for example, like Smith & Nephew, a British maker of replacement joints. There is a range of areas that you can identify where demand from baby boomers will offer opportunities. ......

...... As ever, always do your homework in hunting unloved shares and then just hope that Britain is not turning Japanese

Quote courtesy of The Telegraph
Friday 7 June 2013