It will take years — decades even — for China’s stock market to feel the impact of the country’s latest demographic data. China recently reported that 2023 was the seventh year in a row in which the number of births in has fallen. Netted against deaths, the decline in the country’s total population is accelerating.
While an accelerating decline in population is not good, the China bears are wrong to claim that the latest data means the Chinese stock market is about to plunge. It’s possible that Chinese equities will fall in coming months, of course. But if they do it won’t be because of how many (or few) babies were born last year in the country.
Consider the indicator that has perhaps the best correlation with the stock market, according to numerous studies: The so-called “MY Ratio,” which stands for “Middle-Young Ratio.” It is calculated by dividing the size of a country’s middle-aged population (35-49) to the size of the young-adult cohort (20-34). Researchers have found that a country’s stock market performs better, on average, when its MY Ratio is rising than when it is declining.
There are two noteworthy implications of this research:
- Last year’s births won’t affect China’s MY Ratio, and by extension the stock market, for 20 years.
- It will be even further into the future when last year’s lower birth rate will start having a negative impact on equities. Between 20 and 34 years from now, the size of China’s young-adult cohort will be the denominator of the MY Ratio, and a smaller denominator translates to a larger ratio. In other words, last year’s lower births shouldn’t negatively impact Chinese equities for another 35 years — in 2059.
What does the MY Ratio say about Chinese stocks currently? As you can see from the chart above, China’s MY Ratio will be in an uptrend for the next several years. Because of that uptrend, Alejandra Grindal, Ned Davis Research’s chief economist, said in an email that “China’s equities should continue to have positive tailwinds until 2031, when the MY ratio peaks.”
Of course, demographics aren’t the only factor that will impact the Chinese stock market over the long term. But since it does play a major role, it’s important that we know the direction it’s going. And for the next several years, at least, China’s demographics will help propel its stock market forward — not slow it down as many are claiming.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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