Investing in demographics

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4 | Investing in demographics | Study Investing in demographics The demographic turning point has arrived Demographic changes influence economic and social developments not just over the long term, but will also do so in the immediate future. This year, the number of working-age people throughout the world will decline for the first time ever. Climate change, natural resources, geopolitics, urbanisation, economic growth, tax revenues, inflation, payment balances and investment returns are all affected by this sea change. For investors who would like to adapt their portfolio in response to these developments, the rapidly growing senior citizen age group offers an opportunity. Pensioners have enormous purchasing power and are living an increasingly healthy life. The beneficiaries of this trend are those healthcare and consumer goods companies that cater to the needs and desires of senior citizens. Global population growth and the resulting depletion of resources offer a further investment opportunity. Steady increase in the number of senior citizens The causes of a prolonged lifespan are well known: As a society’s prosperity increases, so does the average life expectancy, even as the number of children per woman (fertility rate) declines. Life expectancy in years 90 80 70 60 50 40 30 1955 1970 1985 2000 2015 2030 2045 Developing countries Industrialised countries Emerging markets Global Since 1950, the average life expectancy in industrialised nations has increased from 66 to 78 years. In the emerging nations, that figure has risen from 42 to 67 years over the same time frame. This remarkable trend is mainly the result of better access to basic medical care, improved personal hygiene and a broader range of foodstuffs. Also, hard physical labour has progressively become the task of machines rather than human beings. This longer life expectancy leads to the fact that, by 2050, the world’s population will have increased by 2.4 billion to a total of 9.3 billion people. Moves to secure the necessary natural resources are already underway in the energy sector and in terms of agricultural land. For example, a South Korean company is attempting to obtain a 99-year lease on 1.3 million hectares in Madagascar alone. That represents close to half of the country’s arable land. But with prosperity comes not only a longer average life, but also a decline in the birth rate. The number of new-borns per woman (fertility rate) has halved since 1950. This is mainly attributable to the changed role of women in society. Fifty years ago, only one in three employable individuals in the industrialised nations was a woman. Since then, the proportion of women in the labour market has increased steadily and now stands at just under 50%. In addition, the decrease in infant mortality has allowed the birth rate to decline. The result: lower population growth rates in the industrialised nations compared to the emerging nations.
Average births per woman (fertility rate) 8 7 6 5 4 3 2 1 0 1955 1965 1975 1985 1995 2005 2015 2025 2035 2045 Developing countries Industrialised countries The “baby boomers” of the post-WWII era are now at retirement age; hence the number of senior citizens will grow at a significantly faster pace than the number of able-bodied workers. Economic consequences of longer life expectancy Employment is the key factor in a society’s ability to produce goods and services. Thus in the past, the surging workforce was a major pillar of economic growth. Employed people generate income, buy things and build houses. Growth trend in working populations 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% –0.5% –1.0% Developing countries Industrialised countries Emerging markets Global 1955 1970 1985 2000 2015 2030 2045 Emerging markets Global In the industrialised nations, the demographic turning point has now been reached. The proportion of working-age people in those countries is no longer on the rise, but instead will decline from now on. The emerging nations will follow their Western counterparts with a considerable time lag. However, economic growth is the most important driver of long-term real returns: net new investments must generate at least the equivalent of real interest rates in order to pay off. From an overall economic standpoint, this is only possible over the long run if real interest rates do not exceed the rate of economic growth. Thus the currently low level of real interest rates also has demographic grounds and is likely to persist for quite some time. Further consequences will presumably result from: • the savings behaviour of the population and thus the possibility to ready financial resources for new investments; • investments of the sizeable sums of retirement capital will increasingly be made in the emerging nations because, there, capital investment projects are taking place that generate the necessary returns – but a major question in this regard will be whether those countries continue to allow access to their capital markets or instead opt to keep the returns for themselves; • also, the departure of older, more experienced workers can mean that valuable know-how is lost, which in turn can have a negative effect on productivity – the solution here is to be had from training and human resource service providers, outsourcing companies and automation specialists; • the ratio of workers to senior citizens (dependency ratio) will leave noticeable marks on national budgets; lower tax revenues from occupational income will stand in stark contrast to higher outlays for social and healthcare costs – the same effect will impact the pension system as well; • costs for healthcare will increase sharply, as will those for consumer goods relative to investment goods because pensioners will be drawing on their capital reserves and investing less – thus the composition of gross domestic product will be reweighted. 5 | Investing in demographics| Study
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