Changing demography is altering the outlook across a range of sectors, with implications for investors.
Since the middle of the last century, the world has seen a population boom, and some of the impacts are only now being felt in financial assets, including equities.
The ‘baby boomers’ of the West’s postwar era, the Party-sponsored birth-rate explosion of Maoist China, and the unchecked population surge of a newly independent India, have each helped to drive the world population to almost triple since 1950, according to United Nations figures.1
As the global population has increased, so too has the average lifespan. In the UK, average life expectancy in 1950 was 68.6 years; today it is 80.8 years.2 The result has been an almighty shift in the balance between workers and retirees – more people are retiring every year and they are living for much longer.
This has obvious consequences for pension arrangements, as we explored in a recent article. But population profiles also have important implications for particular industries (such as pharmaceuticals) – and therefore for financial assets. In Nigeria, where 43% of the population is under the age of 15, and just 3.1% is over the age of 65 an enormous number of young people, keen to buy consumer products, are poised to move to the cities and enter the workforce (and potentially the middle class) in the next few years.3
“Companies like Unilever and PZ Cussons [two personal health products companies] are both affected by changes in demographics,” says Imran Sattar, fund manager at BlackRock. “But they are currently affected more by demographic trends in Nigeria than by those in the UK.”
For investors, just because a demographic trend is clear, this does not mean it translates into obvious sectoral preferences. Pharmaceutical companies in the US, for example, sell many medicines to retirees but their beauty products often deliver their greatest profits from the employed population – and all the more so since products for young men have entered the mainstream.
Another potential complication for investors is that timespans for demographic changes can make trends difficult to tap into. Imran Sattar points out that, as a fund manager, he is looking to add value over a shorter timeframe.
“Years three to seven are where we try to differentiate ourselves as investors. Demographic changes work off a much longer time horizon – around ten to fifty years,” says Sattar.
Nevertheless, while changes in the birth rate may only affect the prices of financial assets over a long time period, they are still significant – and sometimes demographic changes, such as shifts in migration rates, can have effects over the shorter term.
“Ageing populations and low rates drive demand for income from savings pots,” says Ewen Cameron Watt, chief investment strategist at Blackrock. “The history of long-term wealth accumulation is marked by accumulation of land where population density and job growth is greatest.”
That trend can be perhaps most clearly seen in the rise of property prices in London in the years since the financial crisis. While UK birth rates have fallen, London has seen a rise in population due in great part to immigration – whether from the rest of the UK, from other countries in the EU, or from further afield. In Japan, on the other hand, a stagnant and ageing population has weighed on the property sector – at least until recently.
“For 20 years it was not good to be a real estate investor in Japan but now all the east coast is becoming very interesting,” says Cameron Watt. “Re-onshoring manufacturing in Japan has also helped.”
Government bonds arguably have even closer links with demographic trends than equities, since their status is so reliant on the policies of both the home government and its central bank.
“Given that fiscal and monetary policy decision-making is regularly influenced by demography, one of its stronger direct relationships is with sovereign bond markets,” says Brad Boyd of Payden & Rygel.
That means investors are well-advised to allow for those trends in their broader investment strategy. There can be less direct effects of population changes too – and yet these second-order effects can exert an enormous influence on capital markets. Boyd cites a recent example from the Asia-Pacific region.
“In recent years the commodity-heavy Australian economy has experienced a notable slowing trend,” says Boyd. “While lower commodity prices are often cited as the reason, it is the ageing demographic in the Asia-Pacific region that has been a catalyst for reduced demand and ultimately lower prices. Discerning investors who evaluate and connect such dots stand to benefit from these seismic shifts through time.”
BlackRock and Payden & Rygel are fund managers for St. James’s Place.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The opinions expressed are those of Imran Sattar, Ewen Cameron Watt and Brad Boyd and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
2 Our World in Data, accessed 12 May
3 CIA World Factbook, accessed 12 May