60% 40% How population ageing affects financial markets Germany, Japan and USA on focus Rüdiger Daberkow DekaBank Mai 2006 Rüdiger Daberkow DekaBank Mai 2006

2 zGermany and Japan as examples for the demographic development in industrialized societies zDeclining population growth rate also in the US, but thanks to strong immigration and higher birth rates still better development zConsequence 1: Lower potential growth rate zConsequence 2: Pension systems with pay-as-you-go financing in financial distress zConsequence 3: Increasing financial burden of the public budget *year-on-year, % Sources: United Nations, DekaBank Demographic Development Downward trend in population growth Germany and Japan soon with shrinking populations Population growth*

3 zNumber of persons in working age per pensioner halved within the next 30 years zEven heavier financial burden for the already troubled pension insurance scheme zMore individual retirement provisions as sustainable solution zPension systems with pay-as-you-go financing can only guarantee a subsistence-level income zRetirement age to rise in order to soften the effects Number of Persons aged 15 up to 64 years divided by number of persons over 64 years Sources: United Nations, DekaBank Demographic Development Pension insurance in trouble Dwindling number of employees to carry more and more pensioners Persons in working age per pensioner*

4 zIncreasing payments for pensions as well as soaring care & health expenses in older age zUrgently needed investments in education and infrastructure are inhibited by higher budget burden provoked by elderly persons zTo moderate the financial burden due to demography, savings should be made zHowever, public debt now is soaring – in Japan, Germany and the US * in % of GDP Sources: Center for Strategic and International Studies, DekaBank Demographic Development Ageing as a burden for public finance Continuously soaring expenses for elderly persons Public expenses for persons over 60*

5 zLower potential growth due to lower population growth rate and shrinking of the population, respectively zConsequence 1: Potentially weaker development of financial markets zConsequence 2: Increase of public revenues lowered, at the same time soaring public expenditure zConsequence 3: Corporations need to find new markets in order not to shrink with the population „Average“ year-on-year growth of GDP, % Sources: EU-Commission, DekaBank Demographic Development Economic growth tends to weaken Population development no longer a growth driver Potential growth*

6 Demographic Development Effects on financial markets Plunging market prices? zAgeing will lead to increasing supply of stocks and bonds, because of dissaving in retirement age zHigher public deficit due to increasing expenditure for elderly persons will lead to growth in the supply of bonds zLower potential growth will lead to slowdown of the development of stock markets Result 1: Increasing supply tends to result in plunging prices of stocks and bonds … however:

7 Demographic Development Effects on the financial markets Soaring market prices? zMore individual retirement provisions will cause higher demand of stocks and bonds zPension funds will invest more in bonds to keep up with promised returns with less risk zGlobal economic growth is expected to remain high with corporations profiting from it Result 2: Increasing demand of bonds and stocks as well as dynamics of the world economy tend to result in soaring prices of stocks and bonds

8 Demographic Development Effects on the financial markets „Soft landing“ of the markets zThere are good reasons for higher as well as for lower prices in stock and bond markets zRegarding the demographic development, a „soft landing“ of the markets can be expected at last, i.e. tendency to slightly falling prices, but with temporarily higher prices in some periods zDiversification of investments in products and regions as strategy to manage risk

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