We examined the relationship between a country's working age population and its listed company corporate earnings (smoothed out using both 3 year and 1 year moving averages of quarterly data) for ten nations, and found that, contrary to the common assumption that good demographics leads to growing corporate earnings, the relationship is ambiguous at best, with correlations ranging from positive to strongly negative.

Regression analysis of working age population versus corporate earnings

3 yr avg (USD) 3 yr avg (local) 1 yr avg (USD) 1 yr avg (local)
Correl. Coeff. R square Correl. Coeff. R square Correl. Coeff. R square Correl. Coeff. R square
USA 0.97 0.95 0.96 0.91
Canada 0.98 0.96 0.97 0.94 0.95 0.91 0.94 0.89
Australia 0.94 0.87 0.84 0.70 0.83 0.70 0.72 0.51
Germany -0.61 0.37 -0.53 0.28 -0.53 0.29 -0.53 0.28
Mexico 0.76 0.57 0.89 0.79 0.55 0.31 0.82 0.67
S. Korea 0.78 0.62 0.94 0.88 0.85 0.72 0.89 0.80
UK 0.49 0.24 0.75 0.57 0.44 0.20 0.59 0.35
France 0.32 0.10 0.17 0.03 0.26 0.07 0.22 0.05
Japan -0.79 0.63 -0.37 0.14 -0.56 0.31 -0.13 0.02
Turkey 0.50 0.25 0.85 0.72 0.50 0.25 0.86 0.74

Source: MSCI, OECD, Nikko AM estimates

Several countries displayed strong positive correlations between working age population and corporate profits (shown in both USD and local currency terms). Those for the US and Korea were quite robust, in our view; however, we found that for many of these countries, the influence of demographics on corporate profits is minor compared to other factors such as commodities prices. In the case of Australia, corporate earnings closely tracked iron ore prices, while for Mexico and Canada, profits moved according to oil prices. There are of course, other factors at play in these countries beyond commodities, but for those with considerable stakes in natural resources, demographics does not seem to hold much influence over national profitability, despite strong correlations.

USD and AUD Profits compared with Australia Working Age Population

USD and AUD compared with Australia Working Age Population

USD and CAD Profits compared with Canada Working Age Population

USD and CAD compared with Canada Working Age Population

USD and MXN Profits compared with Mexico Working Age Population

USD and MXN compared with Mexico Working Age Population

Sources: MSCI, OECD, Nikko AM estimates, Calendar quarter (CQ) through 4CQ13

Canadian corporate profits versus crude oil price

Canadian corporate profits versus crude oil price

Mexican corporate profits versus crude oil price

Mexican corporate profits versus crude oil price

Australian corporate profits versus China spot iron ore fines (63.5% Iron content)

Australian corporate profits versus China spot iron ore fines (63.5% Iron content)

Sources: MSCI, CSLA, Nikko AM estimates, Calendar quarter (CQ) through 1CQ14

Strongly negative correlations were found for Japan and Germany, which despite declining working age populations, experienced strong corporate profit growth.

Japan and Germany - Profits compared with Working Age Population

Japan and Germany - Currency compared with Working Age Population

Sources: MSCI, OECD, Nikko AM estimates, Calendar quarter (CQ) through 4CQ13

These countries were able to overcome poor demographics through a sustained focus on innovation – for example through the robust adoption of robotics – and with specific regards to Japan, a combination of corporate restructuring, multinationalism and a gradual shift away from mercantilist attitudes towards better corporate governance. Conversely, we found that France shows very low correlation, and consider the dearth of innovation and an inflexible labor market to be strong reasons why French corporate profits have remained almost flat despite decent demographics.

Assuming a constant PER valuation projection, demographics are, thus, not an important determinant of a country's equity market performance. This should be relieving to investors in German or Japanese equities, or even in Korean equities (whose demographic trend has just begun to deteriorate). Conversely, with perhaps the exception of the U.S., investors should not be falsely lured into investing in a country with positive demographic trends; rather, proof of this correlation, especially regarding USD-termed profits, should be witnessed before investing. Of course, the global economic cycle plays the most important role in corporate profits, but some countries with poor demographics can prosper much more than ones with positive demographics during the same long-term cycle. In sum, investors should be quite wary of the demographic argument for country selection.