Demographic trends can be used by investors to predict both the stock and bond market yields, a new study suggests.
According to research from Warwick Business School and Copenhagen Business School, US stock and government bond markets have tracked similar paths since the Second World War.
Yields from both markets followed similar 20-year boom and bust cycles as the US population, reflecting changes in the number of young borrowers and middle-aged savers.
The findings showed that when there were more young workers, who tended to borrow and spend more, stock and bond prices tended to be lower with a potential for greater yields. In contrast, when there were more middle aged workers looking to invest and save, greater demand drove up stock and bond prices, which resulted in lower yields.
This could suggest that the traditional method of splitting portfolios across stocks and bonds may not offer investors the level of protection they thought. Instead, investors may be encouraged to spread their funds across a more diverse portfolio, including international markets to maximise their returns.
Analysts could also use census data to forecast long-term market trends, while wealth managers could use demographic data from around the globe to help them decide where to invest, researchers found.
Dr Arie Gozluklu, associate professor of finance, Warwick Business School, said: “Many wealth managers invest a portion of their fund in stocks and some in bonds, but the common demographic trends can reduce the benefits of such diversification, especially in countries where financial markets play an important role to smooth consumption over time.
“Clearly this cannot explain all movement in the financial markets, especially in the event of crashes, but the effect of the population structure is too important to be dismissed.”
Gozluklu added: “Investors should consider international markets to maximise their returns, especially if they come from countries with small markets. That way, they can invest in the market at a favourable point in that nation’s demographic cycle, instead of being constrained by the prevailing pattern in their home country.”
