As India Overtakes China in Population, Will Its Stock Market, Too?

Is India’s stock market a better long-term bet than China’s?

Some economists think so, now that India is on track to become the world’s most populous nation. Demography, they believe, is destiny.

While China’s population has long been the largest in the world, the two countries are now neck and neck, at roughly 1.4 billion people each, according to the United Nations. India will be No. 1 sometime this year, if it isn’t there already. And by the year 2100, India’s population is projected to be 1.5 billion, while China’s is projected to be 800 million.

A larger population doesn’t automatically translate into a stronger economy or a better-performing stock market, says Alejandra Grindal, chief economist at Ned Davis Research. The more important variable when projecting economic growth is the size of the working-age population. When it comes to the stock market’s long-term prospects, furthermore, it is the size of “the maturing age population that is important,” she says.

The MO ratio

The indicator that perhaps best captures the relative size of these two groups is the so-called MO ratio, says John Geanakoplos, an economics professor at Yale University. The numerator of this ratio—“M,” for middle-aged—is the number of those ages 40 to 49, while the denominator—“O,” for old—contains those from ages 60 to 69. Prof. Geanakoplos is the co-author of an academic paper, published in 2002, documenting that demographic variables such as the MO ratio historically have been significantly correlated with the stock market.

Prof. Geanakoplos says the correlation stems from the fact that the MO ratio is a good proxy for how many people in a country are saving and investing for retirement relative to how many are withdrawing money from the stock market to pay for their retirement. When the ratio is high, there are more savers and investors relative to spenders, which means that capital will be relatively plentiful and interest rates will be lower than they would otherwise be. That in turn means that the discounted value of companies’ future earnings and dividends will be higher. When the ratio is low, in contrast, interest rates will tend to be higher and the present value of future earnings and dividends will be lower.

Prof. Geanakoplos adds that the absolute level of the MO ratio is less important for the stock market’s prospects than its trend. That poses a special challenge to China’s stock market over the longer term, since the country’s MO ratio is projected to decline precipitously over the next several decades—from its current 1.32 to 0.73 in 2050, according to data from Ned Davis Research. This means there will be nearly a doubling in the number of retirees in China pulling money out of the economy and the stock market between now and 2050, relative to the number who are saving and investing.

“Insofar as demography is destiny” Prof. Geanakoplos says, “the long-term prospects for the Chinese stock market are relatively poor.”

India’s MO ratio, in contrast, is projected to decline at a more moderate pace over the next three decades compared with China’s, from its current 1.98 to 1.34. That means that, though demographic factors will be headwinds to both countries’ stock markets in coming decades, not tailwinds, those headwinds will be stronger in China than in India.

Other factors

Ms. Grindal says that while the impact of population trends shouldn’t be minimised, there are many other factors—both political and economic—that will influence the two countries’ economics and stock markets in coming decades.

To put into perspective the demographic headwinds that China and India will be facing, consider the U.S.’s MO ratio. According to Ned Davis Research data, the ratio is projected to rise from its current 1.01 to 1.31 by the end of the 2030s, before declining to 1.15 by 2050. This increase will come as a surprise to many, given recent media attention to Social Security’s financing shortfall. But, Ms. Grindal points out, the millennial generation “is about the same size, if not slightly larger, than the baby boom population,” and is about to enter the 40-49 age cohort. That’s largely what will cause the U.S. MO ratio to rise. Relative to China and India, in other words, the U.S. MO appears quite favourable.

Former New Hampshire Gov. Chris Sununu delivered a warning to Treasury Secretary Scott Bessent during a recent visit to Washington: Already-high airfares will surge if the war in Iran doesn’t end soon.

Sununu, a Republican who represents some of the biggest airlines as president of the industry group Airlines for America, has for weeks sounded the alarm to Trump administration officials about the economic fallout from high jet fuel prices. The war, Sununu has argued, must come to a close soon, or things will get worse.

Administration officials have gotten the message.

Privately, President Trump’s advisers are increasingly worried that Republicans will pay a political price for the rising fuel costs, according to people familiar with the matter. Many of those advisers are eager to end the war, hoping prices will begin to moderate before November’s midterm elections.

The fallout from the U.S.-Israeli attack in late February has slowed traffic through the Strait of Hormuz, a vital shipping lane, triggering a sharp increase in oil, gasoline and jet-fuel prices.

That means consumers are grappling with high costs ahead of the summer travel season, as they consider vacation plans.

Sixty-three per cent of Americans said they put a great deal or a good amount of blame on Trump for the increase in gas prices, according to a new poll conducted by NPR, PBS and Marist.

More than 8 in 10 Americans said struggles at the gas pump are putting strain on their finances.

Jet-fuel prices roughly doubled in a matter of weeks after the war began, and they have remained high. Airlines have said that will add billions of dollars of additional expenses this year, squeezing profit margins.

U.S. airlines spent more than $5 billion on fuel in March—up 30% from a year earlier, according to government data.

Carriers have been raising ticket prices, hoping to pass the cost along to consumers, and they are culling flights that will no longer make money at higher price levels.

In March, the price of a U.S. domestic round-trip economy ticket rose 21% from a year earlier to $570, according to Airlines Reporting Corp., which tracks travel-agency sales.

So far, airlines have said the higher fares haven’t deterred bookings and they are hoping to recoup more of the fuel-cost increases as the year goes on.

Earlier this week, Trump said the current price of oil is “a very small price to pay for getting rid of a nuclear weapon from people that are really mentally deranged.”

Secretary of State Marco Rubio told reporters that if Iran got a nuclear weapon, the country would have more leverage to keep the strait closed and “make our gas prices like $9 a gallon or $8 a gallon.”

Trump has taken steps in recent days to bring the war to an end. Late Tuesday, the president paused a plan to help guide trapped commercial ships out of the Strait of Hormuz, expressing optimism that a deal could be reached with Iran to end the conflict.

Crude oil prices fell below $100 a barrel on Wednesday, after reports that Iran and the U.S. are working with mediators on a one-page framework to restart negotiations aimed at ending the conflict and opening the strait.

Sununu said Trump administration officials are conscious of the economic fallout from the war: “They get it…and I think that’s why they’re trying to get through the war as fast as they can.”

But he cautioned that it could take months for prices to return to prewar levels.

“Ticket prices won’t go down immediately” after the strait is fully reopened, Sununu said. “You’re looking at elevated ticket prices through the summer and fall because it takes a while for the prices to go down.”

Since the initial U.S.-Israeli attack in late February, Sununu has met in Washington with National Economic Council Director Kevin Hassett, representatives from the Transportation Department and senior White House officials.

A White House official confirmed that Hassett and Sununu have discussed the effect of increased fuel prices on the airline industry. The official said the conversation touched on how the industry can mitigate the impact of high jet fuel prices on consumers.

“The president and his entire energy team anticipated these short-term disruptions to the global energy markets from Operation Epic Fury and had a plan prepared to mitigate these disruptions,” White House spokeswoman Taylor Rogers said, pointing to the administration’s decision to waive a century-old shipping law in a bid to lower the cost of moving oil.

Rogers said the administration is working with industry representatives to “address their concerns, explore potential actions, and inform the president’s policy decisions.”

A Treasury Department spokesman pointed to Bessent’s recent comments on Fox News that the U.S. economy remains strong despite price increases. The spokesman said Treasury officials have met with airline executives, who have reaffirmed strong ticket bookings.

“We’re cognizant that this short-term move up in prices is affecting the American people, but I am also confident, on the other side of this, prices will come down very quickly,” Bessent told Fox News on Monday.

The war has already contributed to one casualty in the industry: Spirit Airlines. Company representatives have said they were forced to close the airline because the sustained surge in jet-fuel prices derailed the company’s plan to emerge from chapter 11 bankruptcy.

The Trump administration and Spirit failed to come to an agreement for the company to receive a financial lifeline of as much as $500 million from the federal government.

Transportation Secretary Sean Duffy has argued that the Iran war wasn’t the cause of Spirit’s demise, pointing to the company’s past financial struggles, as well as the Biden administration’s decision to challenge a merger with JetBlue.

Other budget airlines have also turned to the federal government for help since the U.S.-Israeli attack. A group of budget airlines last month sought $2.5 billion in financial assistance to offset higher fuel costs, and they separately wrote to lawmakers asking for relief from certain ticket taxes.

As India Overtakes China in Population, Will Its Stock Market, Too?

The key, say some economists, is to look at the ratio of those who are middle age to those who are older

The MO ratio

Other factors

Administration officials have spoken to the airline industry, which has voiced concerns about the rising costs.