Why Rates of Return on Equity Are Likely to Drop Going Forward

As the world economy and financial system struggle to regain their footing, they must contend with a number of problems. One of these is a negative change in demographics. 

The population is aging rapidly and the proportion of retired to working people is rising sharply. Although demographic projections of population, life expectancy, and fertility are not free from error, the nature of aging means that for all intents and purposes, demographics are our destiny.

As each year passes, there are proportionately fewer young people, and more older people in the work force. As a long-term trend, the unique combination of rising life expectancy and weak fertility rates will define the economic and asset environment. Unless the effects of population aging are offset by purposeful shifts in micro and macro policy, we are losing an important driver of economic growth, and therefore, of top-line revenues.

The loss of growth drivers arising from labor supply and labor market developments doesn’t mean that equity values are going to decline absolutely and persistently, but it does suggest that the rate of return on equity will drop compared with previous decades.