Value Column von Hans Peter Schupp

15 JANUARY 2025

Is the baby boomer boom coming to an end?

Hans Peter Schupp, managing partner of Fidecum AG und portfolio manager of the Contrarian Value Euroland Fund (ISIN: LU0370217092) on demographics and their impact on the capital markets.

 Demographic processes develop slowly and therefore often remain hidden. But they are powerful, dominate long-term trends and are also easy to predict. Anyone who was not born in 2000 will not be 25 years old in 2025. It’s as simple as that.

In Germany, demographics are usually analyzed in connection with the labor market or pensions. But it also has a major influence on the capital market. According to the life cycle theory, most people have enough income from around the age of 40 to invest more in shares for their retirement provision. When they reach retirement age, they are usually advised to gradually reduce their equity allocation again. This is because many investors then have to live off their savings. In addition, they do not have much time left to make up for any potential price setbacks. All of this has an impact on the flow of money on the capital markets.

Boomers‘ savings drove the stock markets – and the ETF industry

The most important investor group in  this context are the so-called baby boomers. According to common definitions, this refers to the large number of people born between 1950 and 1964 in the rich, big seven industrialized nations during the rise in birth rates after the Second World War. Their investment behavior has indeed had a significant impact on the stock markets in recent decades.

Between 1990 and 2004, the boomers reached the age of 40 and began to invest heavily in shares for their retirement provision. The demand for suitable investment products increased accordingly. ETFs on broad indices benefited in particular, establishing themselves as a simple, diversified and cost-effective long-term investment.

The steady inflow of money also had an impact on the valuation of securities. More capital chased a number of shares that remained constant at best. As a result, the price/earnings ratios on the stock markets rose. While the cyclically adjusted ten-year P/E ratios of the S&P 500 fluctuated between 10 and 20 from 1985 to 1995, this ratio has fluctuated between 20 and 35 in the last five years. Share prices have risen. Book profits and the perceived wealth of investors increased.

Now the baby boomers are retiring and start dissolving their savings

This long-term trend could reverse in the future. Boomers in the G7 countries are now between 61 and 75 years old. They have made a large fortune on the stock markets in recent decades. If they follow the advice of financial planners, they are likely to gradually reduce their equity allocations in the coming years and withdraw capital from the stock markets. 

Of course, this does not necessarily mean that capital inflows to the equity markets will stop abruptly. After all, the younger generation is just discovering the benefits of long-term equity savings. The middle classes in emerging and developing countries are also becoming wealthier and have more capital left over for investment.

Nevertheless, cash inflows are likely to slowly but surely decrease over the next few years. It therefore makes sense to start thinking about the consequences for individual investment segments today. If the flow of capital thins out, so-called trend investments are particularly at risk. These include, above all, shares that are not bought with a view to the current fundamental data, but in the hope that more and more money will flow into these stocks and will drive up prices and valuations. Such trend investments are, for example, the shares of the Magnificent Seven, but also the American share indices dominated by these stocks. Even the currently most popular investment – ETFs on the MSCI World Index – should be treated with caution against this backdrop. After all, anyone investing in this index is buying 70 percent US equities and has only invested 20 percent of their capital in five! US stocks. This is not a sensible diversification in global entrepreneurship.

Value shares could secure equity assets during the period of dissolving savings

If capital is withdrawn from the global equity markets in the coming decades, this is also likely to have an impact on stocks that are currently valued at a low level. Nevertheless, we believe that a return to real values is likely in this case. If a company with a solid business model is trading at a price/earnings ratio of ten, it generates a return of 10% and can pay out a large proportion of this. It is therefore likely to become a more attractive investment for baby boomers who want to finance part of their retirement through interest and dividend income.

Demographic processes are developing slowly, but with a very high probability. They will have an impact on capital flows and valuations on the equity markets in the coming decades. Investors should therefore start today to diversify their portfolios and move away from “trend investments” and into proven value stocks.

Our investment approach

With our Contrarian Value Euroland Fund (ISIN: LU0370217092), we have remained true to our investment philosophy for 25 years. We invest in undervalued companies with potential and a comprehensible business model. In doing so, we act like an entrepreneur who wants to buy the entire company and – if necessary – deliberately go against the prevailing market opinion.

About the author: Hans Peter Schupp is a managing partner of Fidecum AG and the portfolio manager of the Contrarian Value Euroland Fund.

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