Middle age hits equities

If equities have a life cycle, growth in equity valuations in China is set to slow in the next few decades, 'ageing' in line with the country's population.

The 'life cycle hypothesis' is part of an HSBC report that correlates equity values with the size of a middle-aged population, because they are the people most likely to invest in equities. The report says there is a 'very striking relationship' between the percentage of the US population aged 35 to 54 and the market's price-to-earnings ratio.

According to the authors, America's middle-aged population hit a trough in 1980 at below 25 per cent, peaked at almost 30 per cent in 2001, and has been going downhill since then - mirroring the trajectory of its PE ratio.

The proportion of middle-aged people in China peaked at 31 per cent last year and is projected to bottom in 2050, falling to a quarter of the country's total, indicating a possible future drop in demand for equities and in equities valuations. Other emerging markets that have already passed their own middle-age peaks are South Korea, Thailand and Chile.