By Anna J. Park
After Korea's year-on-year population decreased for the first time in 2020, according to recent census data, investors are wondering what will be the long-term impact of this demographic change on the country's stock markets.
The fall in population is somewhat gloomy for Korea, if the rate continues for some time. According to a projection by Statistics Korea, the nation's population could fall to less than 30 million by the 2060s, and to around 20.8 million by the next century.
There have been various studies on the impact of demographic structural changes on stock prices both in and outside the country. Most previous studies have shown that stock prices are negatively affected by an increase in the retiree population, while they are positively linked to the well-being of a prime earning age population. If there are more retirees in society, they tend to cash in on their stock investments at a higher rate than those in their prime earning age, and this could negatively influence the entire country's stock markets.
However, market experts argue that an overly simplified approach, relying on only one variable of demographics in analyzing highly complicated markets like stocks, is not very relevant.
"In the end, stock prices are a function of corporate profits. Dwindling demographic changes could pose a problem in the long term, yet one needs essentially to consider where Korean companies will be mostly making money by then," Stephen Lee, chief economist at Meritz Securities, said.
"Two important criteria that determine what a country's stock prices will be: first, in which countries or markets the companies earn profits, and second, how Korean companies will be positioned in fast-growing innovative sectors. Given the two considerations, it is hard to tell whether the future of the Korean stock market will be dim due to a potential decrease in the population."
He also elaborated that a population decrease does not correlate with a decrease in the amount of money invested in the stock market.
"Retail investors' tendencies to own stocks in their portfolios, as well as the amount of liquidity in the markets, are hard to predict at this point. Thus, one doesn't need to be overly concerned about one variable of the market," he said.
A study by the Korea Capital Market Institute also showed that, after researching dozens of developed countries' macro data, an increase in the population of retirees and senior citizens does have a statistically inverse relationship with stock prices. Despite this fact, however, the study added that such a demographic structural change only explains about 10 percent of stock price changes.
The study also concluded that this inverse relationship could be weakened, as investment capital has been crossing borders more freely since the 2000s. The paper also highlighted that a country's economic direction heading towards knowledge-intensive innovative sectors would attract capital from overseas, making up the demand side of stock markets.
Other studies have pointed out that lengthened life expectancy of senior citizens has turned out actually to delay their withdrawal from stock markets.