Sensex 150,000 Depends on this Chart

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Sensex 150,000 Depends on this Chart podcast

Apr 2, 2022

Japan is a harbinger of what's to come across much of the world. While fewer people may be good for the environment, it is terrible for civilization and economic growth. For, long term economic growth hinges on an expanding population.

But how does that concern you as an investor?

How is this related to the direction of the Sensex? What exactly is the relationship between stock markets and population growth?

Why are demographic trends so critical for equity returns?

Watch this video to find out...

The Bank of Japan has been buying up stocks, bonds, and exchange-traded funds going into billions of dollars. At one point in 2021, the Japanese central bank was the biggest investor in Japanese stocks

The central bank did this to counter what is fundamentally a demographic problem. In his defense, the BOJ governor is not the first central banker to pursue such a course. And he only has monetary power at his disposal. But that power might be put to better use... attracting the millions of immigrants who are needed to help Japan avoid an eventual demographic collapse.

Yes, you heard that right!

The headwinds are fierce: Japan's population is expected to decline by 40% between 2020 to 2100, falling from 126 million to 75 million. Losing 50 million people while stuffing money in the pockets of those remaining won't stem the tide: It's more like giving bailing buckets to the passengers on the Titanic.

If you don't believe me, look at the charts here.

This was the population pyramid of Japan in 1962...a relatively health one...with more youngsters.... than retire.

Now observe the changes carefully. This is how the pyramid looks as we speak today. The pyramid is gently getting inverted.

And finally, Japan will become an economy with a higher population of dependants by 2052. Such an economy is completely dependant on outsiders for savings, productivity and growth.

Unfortunately, Japan is a harbinger of what's to come across much of the world. And while fewer people may be good for the environment, it is terrible for civilization and economic growth. For, long term economic growth hinges on an expanding population.

But how does that concern you as an investor? How is this related to the direction of the Sensex? What exactly is the relationship between stock markets and population growth? Why are demographic trends so critical for equity returns?

I will answer all of this in a bit.

Hi...I am Tanushree Banerjee, editor of Equitymaster's bluechip recommendation service, StockSelect.

Welcome to Safe Stocks where we discuss ideas to create and preserve wealth in the safest stocks. If you haven't subscribed to the Equitymaster YouTube channel yet please do and click on bell icon to get notification for my latest videos.

So, to put it simply,...stock markets need a confluence of at least 3 basic factors...economic growth, corporate earnings and interest rates.

What happens when either of them is faltering?

Take the case of the US stock markets.

Like the pyramid shows here, the country had a bulging young population in the 1950s.

By the late 1990s, a large young population was looking to invest. Since the interest rates were not favourable, most of the investible surplus came into stock markets.

The money chased the much hyped tech stocks.. thereby creating the dot bubble. So, it was a demographic reason that led to the bubble and eventual crash.

Is such a tech bubble possible in the US today?

It certainly is...and for different demographic reasons.

This is how America's population pyramid looks today. There is a large volume of people heading towards the retirement age.

The year 2023 will see the peak of American baby boomer population crossing the retirement age. This means a large chunk of stock market investors may want to exit the markets and invest in safer avenues. Higher interest rates may facilitate that. Which means, plenty of overvalued stocks could get shunned and fundamentally weak ones could see a permanent re-rating.

So you the demographics are related to the stock market fortunes?

This is not just the case with the US. Take the case of China too.

The Chinese pyramid is relatively healthy today.

But this is how it will look in another 30 years unless the birth rate goes up dramatically.

So, where does that leave India?

Well back in 1992, India had what can be called the perfect population pyramid. Looks at this, India's pyramid was literally picture perfect.

Why do I say that? Because if you compare India's pyramid in 1992 to the global population pyramid, India had the structure of one of the youngest populations.

India's demographic dividend has been a huge catalyst for economic growth over past three decades.

And this is what I call the key chart that will determine the path to Sensex 150,000.

The logic is simple...Typically companies require economic demand to prosper. They need gains in productivity and the working-age population is what drives that growth. We haven't found a way to stop the aging process, so an expanding population is required to replenish and expand the number of workers who contribute to the economy. If that working-age cohort is remains stable, firms find it easier to grow their revenues and profits. With innovation, the companies can target higher growth rates. As a result, their valuations, which depend on expected growth, will soar.

That is exactly what is happening in India right now.

And if India's population pyramid does not get too destabilised, getting to Sensex 150,000 in just a few decades should not be a challenge.

Naturally, the valuations-to-population interplay is not a linear relationship.

So, in the US, currently the CAPE ratio which is widely used valuation metric is well above its historical average. So, it isn't where it should be based on population dynamics. But as more US workers retire, they will swap equities for bonds, which does not bode well for the long-term demand for stocks. Afterall, every seller needs a buyer.

So, then this is what happens. As the appetite for US stocks gets lower, so soes the valuation. As per Robert Shiller CAPE ratio, the forecasted PE multiples for US stocks is much lower than what it is currently.

Therefore, what matters for Sensex 150,000 is a healthy population pyramid apart from innovation, good governance and benign interest rates.

Next time, you consider stocks for your very long term or forever portfolio, keep this chart in mind.

Hope you like this video. Stay tuned for more such videos on the safest and most appealing permanent wealth creating stocks. Thanks for watching.

Tanushree Banerjee

Tanushree Banerjee (Research Analyst), is the editor of Stock Select and Forever Stocks. Tanushree started her career at Equitymaster covering the banking and financial sector stocks and scrutinising RBI policies. Over the last decade, she developed Equitymaster's research processes that helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham, and Joel Greenblatt.

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