Demographic effects on interest and equity returns

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Demography does not affect day-to-day stock market concerns in the short term, but it does in the long term. Aegon AM investigates and sees mixed signals in interest rates. Equity returns in EM will become less buoyant.

Suppose India continues its economic advance and GDP per capita goes up by a few hundred dollars a year. For a Dutchman that sounds like little, but for an Indian it is quite a lot and for the world too, because more than 1.4 billion people live in India.

It is these kinds of sums that Gertjan Medendorp and Ritchie Thomson of Aegon Asset Management deal with in their report ESG Megatrends: Demographics.

Their message is that demographic developments have played a major role in the last century and will continue to do so. They have effects on savings and investment rates, productivity and economic growth, which in turn affect bond and equity returns.                                                                                                      

What is Demography?

Demography is more than the ratio between young and old and population growth. It is also about how long people live and work, what kind of work they do, how they are educated, migration flows and urbanization.

The significance of demography for the economy is not an exact science. There are two basic theories that have played a major role in recent decades: the life cycle hypothesis and the consumption mitigation hypothesis.


The Life-cycle hypothesis assumes that saving behavior is age-dependent. Young people save little or no money. On the contrary, they borrow money to pay for their studies, buy food and finance a house.

When people get older and receive a higher salary, their behavior changes and they start to reduce debts and build up a pension until at some point there is a turnaround and people start to dissave again.

They buy a camper, a boat or a holiday home because they can no longer enjoy all those savings after their death.

Consumption smoothing

Better health care plays a role in the consumption smoothing hypothesis. People are getting older and are therefore saving longer. The dutchie stock is found online. The large consumption of capital therefore starts later, after all, no one knows whether he will live until he turns 100, 90, 80 or 70.

Because they save longer and more, more money is automatically available (via the bank) for companies that can invest with it. That lowers the interest. It’s a question of supply and demand.

Trend in interest rates

In view of these two hypotheses, especially in wealthy Western countries, it is not surprising that interest rates have been falling for decades. However, Aegon AM warns against extending this trend into the future.

There are demographic reasons to believe that the downward trend in interest rates is nearing its end in the West. An important one is the number of people aged 80 and over. That number will increase more than the number of over-65s.

Since the over-80s can really be expected to dissave, this can lead to rising interest rates (less supply). Moreover, more money is needed for their care. That also makes money a scarcer commodity.

On the other hand, an aging (shrinking) population generally requires less investment. That in turn pushes up interest rates.

All in all, Aegon concludes that interest rates in developed countries will remain more or less the same. The same goes for the savings rate. Investments and return on invested capital (equities) are falling.

Emerging markets

The situation is different in emerging markets and developing countries with their relatively young growing population. If these countries make the right investments in youth health, education and quality of life in the cities, then there is a “demographic dividend”.

This includes higher interest rates and a higher return on invested capital. However, the demographic models also show that countries such as India and Indonesia are likely to follow the same path as the West, with fewer children, population stagnation, more highly educated people and more women working. This means that patterns that Western countries have already experienced are still to come.


As mentioned, demographics only have stock market effects in the long term. These are different in developed countries than in emerging markets. For Europe, Aegon AM expects returns on equities and bonds to decline minimally.

With regard to the level of interest income, Aegon AM counts on more uncertainty than with equities. Equities and bonds can still yield a lot in emerging markets, but this will gradually diminish over the next 20 years. The trend in interest rates is down, but by how much is more uncertain than the fall in stock returns.


January 16, 2023 |
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