The promise of middle age

February 28, 2011

The wave of popular discontent now sweeping the Middle East and North Africa has been driven by the region’s youth, frustrated by chronic umemployment and enraged by widespread corruption.

In a special report entitled ‘Youth bulges and equities’, Deutsche Bank argues that the proportion of angry young men to the general population is not only a gauge of socio-political stability but also a key indicator of market performance.

The ‘youth bulge’ — the ratio of males between 15-29 versus those aged 30-59 – came in at an average of 106 percent in the 251 conflicts seen around the world between 1950 and 2006. Two-thirds of countries that suffered social upheaval had a young-to-old men ratio of above 100 percent compared to the current 45-55 percent average seen in developed countries.

“The history of war is the history of young men in conflict. Over history, a number of revolutions and wars have been associated with rising youth bulges…the civil war in medieval Portugal, the Spanish Conquistadors in Latin America were mainly second and third sons…and the French Revolution in 1789. Student uprisings in the late 1960s have also been linked with the youth bulge,” Deutsche said.

This demographic factor has “predictive power” in projecting equity market returns.

Examining the equity market performance of 10 developed countries — five with the lowest youth bulge, five with the highest — Deutsche found that in six out of eight discrete periods between 1970 and 2010, those markets with the lowest proportion of youth outperformed their peers with the highest ratios.

Over the coming decade, emerging markets will see the most dramatic decline of this ratio.

Egypt’s is at approximately 90 percent but is projected to decline to 70 percent in 10 years while Iran at

100 percent will see its youth bulge fall to 55 percent, where the U.S. currently is.

The likelihood of conflict in emerging markets will thus decrease as their populations become more middle-aged. This, in turn, will be positive for equity performance with stocks linked to tourism. financial and defense sectors expected to shine.

What Deutsche posits sounds like an investor’s version of Aristole‘s ‘golden mean’: “Middle age, middle income levels and the middle class tend to be a productive potential combination for equities.”

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[...] significant since the relationship between a country’s political stability and its proportion of angry young men has been well [...]

[...] since the relationship between a country’s political stability and its proportion of angry young men has been well [...]