Slower economic growth rates and lower savings rates in developed countries brought about by an aging population will not automatically translate into weaker financial market conditions, according to the new report from UBS.

The UBS Wealth Management Research projects that countervailing forces will mitigate the negative impact of population aging on overall economic growth per capita. Even a rising transfer to older generations will leave the per capita income growth rate of the working age population at a surprisingly solid level, it notes.

The report shows that countries most affected by aging demographics will need to find ways to transfer economic production from workers to elderly generations in order to prevent an absolute decline in the living standards of the elderly. Also, continued growth in the working age populations of many developing countries is expected, which should continue to support economic growth rates in those countries.

It also suggests that demographics will also have only a mild impact on financial markets. “Demographic shifts will likely be overshadowed by other fundamental trends, such as the geographic diversity of earnings, the integration of global capital markets, and shifts in institutional pension plan holdings,” the report argues.

“On the earnings side, as corporations invest abroad and increase the geographic diversity of their sales and cost structure, earnings will increasingly decouple from home country economic growth rates,” it says.

“Meanwhile, real interest rates, will increasingly be set by the global interplay between the demand for investment and the supply of savings. In industrial countries, any reduction in saving brought about by the drawdown in financial wealth during retirement should exert upward pressure on real rates, while the opposite should occur in developing countries,” it adds. “However, increasingly integrated bond markets will ensure that these effects are limited. In particular, capital flows from thrifty emerging markets into low-saving developed countries will likely constrain upside pressure on real rates in developed countries.”

The impact of demographic trends on financial markets may be more apparent through shifts in pension plan holdings, the UBS report suggests: “Under a reduced investment horizon, pension plans will likely seek to shift their asset allocation toward bonds and away from equities, and may even begin to shift their debt holdings to shorter-maturity bonds as plan participants age. Overall, the described shift in portfolio composition should negatively affect equities and support bonds.”

Areas in which UBS expects widespread demographic change will have a profound impact are in the products and services people demand and, consequently. the health and prosperity of the industries affected and their attractiveness for financial investments.

According to UBS, the impact of demographic change on industries and companies will be far-reaching, requiring a thorough understanding of the key issues facing each particular sector. “In some sectors, such as food manufacturing and auto assembly, production centers will likely shift to regions with less expensive labour,” it says. “In others, such as orthopedics and banking, products and services will change to meet the demands of an aging customer base. New industries, such as robotics and household medical equipment devices, will emerge to address labour shortages and meet the needs of elderly consumers.”