Old is gold!
Investing to take advantage of an ageing population
The global population is increasing and ageing.
This creates many challenges...
Healthcare, property, infrastructure, leisure and travel are just some sectors that could boom.
For every single person in the world over 60 today, by 2030 there will be 1.5 and by 2050 there will be two - the population of over 60s will have doubled.
This change is easy to forecast but difficult to imagine. What's certain is that the economic and social consequences of such a change will be profound.
But it’s a well worn fact that the world is getting older. What is not so well known is how can investors benefit?
That's why population dynamics have moved to the forefront of many investors’ minds and by identifying and understanding the key trends, investment managers can identify the companies that will benefit.
In this feature we outline some of the key long-term trends and look at how investment managers can take advantage.
Old is growth
The ‘greying of the world’ means that those in the older age brackets will carry greater influence over time.
In particular, the purchasing power of the older affluent cohort in the developed world will be of immense significance.
In the future they are predicted to account for just 6% of the global population - but represent 31% of global expenditure.
Wow! That is a truly dominant position.
Within these regions, the large number of 40–64 year olds and the increasing amount of people over 65 (relative to other age groups) means that they will absolutely dominate consumer spending – not just in number, but also because their per capita spending power is greater than other age brackets.
Therefore, businesses that are able to successfully appeal to these consumers, have, in my opinion, access to huge growth potential.
In comparison, the younger market segment will no longer be the driver of consumer growth it once was, with the number of 15–24 year olds declining globally in the next
The rise of the affluent oldie
One of the key demographic themes over the coming decade will be the growth in higher-income portions of the middle class globally, specifically in the $20–50k range.
This rise in global affluence will inevitably require investors and businesses to reappraise their notion of what defines middle class: their buying habits, brand affiliations and lifestyle choices. Of real significance though, is where this increasingly wealthy income group is located.
By far the largest increase in middle class spending power will be in China.
The rise here will be astronomical compared against other regions, with an additional 402 million people in the $20–50k range, an extra 160 million people in the $50–100k range, and a further 56 million people with incomes of $100k and above by 2025.
Taking an even more granular view, the latter sector ($100k and above) is a particularly marketable segment: they will be largely based in just 28 out of China’s 655 cities, meaning that smart brands and demographically aware businesses can reach 70% of them by targeting just a few of the most affluent cities.
How am I currently employing this knowledge?
From my perspective as an income investor, harnessing the benefits of this trend is somewhat nuanced.
Many Chinese companies are still unable to provide the kind of stability in terms of margins and dividend streams that we look for.
However, foreign firms with well established exposure to the region are a valid alternative for accessing the long-term, structural wealth expansion in China.
In particular, companies such as fragrance manufacturer Givaudan, which leverages a huge amount of intellectual property by selling its fragrance and flavours technologies to consumer companies should be a long-term beneficiary of this secular trend, without being excessively exposed to these highly competitive markets.
China in general still lacks strong consumer brands to compete with foreign counterparts, so large-brand Western
companies are often also at a distinct competitive advantage.
With the world getting older, it’s no surprise that the number of chronic health conditions is set to rise.
As a result, the healthcare market is inevitably going to expand. However, the huge increases in healthcare spend predicted by many will not necessarily play out along traditional lines.
It will be progressively more important for investors to widen their thinking around this sector, focusing on expanding markets such as nutrition and wellness, rather than the existing areas such as pharmaceuticals and hospitals.
Perhaps surprisingly, the region that will have the largest absolute share of this growth will actually have the lowest
percentage rate of increase – North America will continue to dominate the world’s healthcare spending, constituting almost a third of global healthcare spend increases by 2025, with more than half of this expenditure made by the government.
In this respect, companies such as US pharma firm Merck, which looks set to maintain existing market share in North America through its growing oncology franchise, appears well placed to benefit from these particular demographic projections.
Work for longer, spend for longer
One of the most important, but under-acknowledged demographic trends relates to the way we perceive the timeframe of our working life.
Driven by a greater need to fund extended lifespans, we are likely to witness a large-scale mobilisation of an older generation of workers in the coming years.
The mustering of this older-age workforce is already taking place. Current figures suggest that in the UK and US almost a quarter of males aged between 70–74 years of age are still in full-time employment.
What this means is that a growing amount of people aged 65 and over will continue to earn and spend money, increasing the purchasing power of this already burgeoning part of the population; a fact that consumer-orientated businesses will ignore at their peril.
Interestingly, from an economic perspective, despite ageing populations, dependency ratios, and therefore national output, will remain largely unaffected as people maintain
the labour force simply by working later in life.
In fact, in developed economies, it is estimated that by 2025, older workers will swell the working population by 116 million.
China and India - big gets bigger
China will continue to be significantly impacted by not only an ageing population, but also the effects of the rural to urban migration that has occurred over the last twenty years. The artificial age bulge in China’s urban workforce will move into the 40–64 year age bracket, lifting it by 33% in the next decade, an increase of over 100 million people.
This group will be enthusiastic savers (due to the lack of provision in China’s healthcare system) and will continue to
invest significantly in the stockmarket and in property.
However, as the first fully educated generation in Chinese society, they will be big consumers of media and travel, as well as being increasingly active in healthcare subsectors such as wellness.
India’s working-age population will increase in the next ten years, but any perceived demographic dividend is a myth.
A lack of education provision in India has meant that only
33% (compared with 70% in China) have a lower secondary
level of education. This figure is unlikely to dramatically improve, rising only modestly to 43% by 2025
(compared with 72% in China).
Without a large pool of educated workers, India has not experienced the same rise in urbanisation and the attendant increase in productive capability as in China. While this large, poorly educated labour market may be expanding, jobs aren’t there to match it. In fact, to maintain existing employment levels India needs to create eight million additional jobs a year.
The Indian economy will not grow as fast as many investors expect because aggregate national productivity is likely to remain inhibited as a result.
Tomorrow's people - demographics and investments for the future
As bottom-up stockpickers, our interest is always at the individual company level. However, an extrapolation of demographic trends can be the starting point for some compelling ideas.
As previously mentioned, healthcare represents a large profit pool, both now and in the coming years.
Firms that can find solutions to the increase in chronic
diseases such as diabetes are likely to be able to lock into these pervasive demographic trends.
Companies such as Novo Nordisk and Sanofi that are allocating significant capital towards innovations in drug development and patient care are therefore likely to be able to generate significant shareholder value over the long term.
Meanwhile, isolating how the new affluent segment is likely to spend its money can highlight long-term ‘megatrends’, such as air travel. With air passenger numbers projected to reach 7.3 billion by 2034* targeting companies like Airbus that are likely to benefit from this kind of demographically driven structural growth is crucial.
We believe the European aeronautic firm is particularly well placed to service the demands of an increasingly wealthy cohort, with a 60% market share† of the next generation of narrow-bodied aircraft orders likely to provide greater earnings power, free cash flow generation and
improved dividends to shareholders.
And of course, as the world gets older and the need to save for longer becomes more pressing, investing in asset gatherers and insurers is another way of accessing the opportunity that demographic change presents. Financials with a large Asian presence, such as AIA and Prudential look particularly well disposed to this positive, long-term growth story.
The world is undoubtedly in uncharted demographic waters, with the seismic shifts in the global population having huge structural impacts on markets.
While it is impossible to project demographic trends directly on future asset prices, it would seem foolhardy for anyone with a long-term investment horizon not to consider the permutations of such momentous population change.
*Source: IATA. †Source: Martin Currie
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Unless otherwise stated, all data supplied with kind permission of Dr Clint Laurent, Global Demographics Ltd. www.globaldemographics.com
This information is issued and approved by Martin Currie Investment Management Limited. Please note that, as the shares in investment trusts are traded on a stockmarket, the share price will fluctuate in accordance with supply and demand and may not reflect the value of underlying net asset value of the shares.
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