18 Mar 2022
The world is changing rapidly, with three key demographic trends at play: we are living longer lives; we are living better lives; and there are more lives on the planet than ever before. We deep dive into the economic and investment implications of these shifts, outlining some of the areas that appear best placed to reward investors over time.
Demographic analysis is the study of historical and projected changes in populations over time that have the power to have significant economic and social impacts. Unlike macroeconomic cycles and investor sentiment, demographic trends are slow-moving and play out over long periods, so their cumulative effects are not properly discounted by myopic markets.
Importantly, demography is one of the few social sciences where projections can be made with a relatively high degree of certainty. Looking 10 years into the future for example, we can confidently predict the working-age populations of most countries (barring unpredictable events such as wars, epidemics, or catastrophes) and this can be done with greater certainty than the GDP forecasts of those countries.
There are three key demographic trends shaping the world of tomorrow:
In recent decades, people in all countries in the world have experienced impressive progress in health that has led to increases in life expectancy. At the same time, we are witnessing a clear decline in fertility rates. As a result of these two trends, older persons (aged 60 and over) today comprise the world’s fastest growing age group and, for the first time in 2045, this group is expected to exceed the number of children (aged under 15).
Although ageing is most prominent in developed countries, it is a global phenomenon and every country in the world is experiencing growth in the size and proportion of older persons in their population. By 2050, 80% of people aged over 60 will live in developing countries, up from 60% today. This means that there will be 2 billion people aged over 60 by 2050.
Case study: Opportunities for industrial automation
As the reduction in the working age population reduces labour supply, it can create opportunities for companies operating in the robotics and automation space. MIT economist Daron Acemoglu argues that ageing is one of the most important factors for automation technologies, accounting for 35% of the country variation in the adoption of robotics. Two of the countries with the highest density of robots are Japan and Germany, which have some of the oldest workforces in the world. In contrast, the UK and France, which are ageing slower than other developed countries, are much less advanced in their adoption of robots.
Importantly, the trend towards ageing populations is still in its early stages and other countries are likely to grow older. China’s working age population shrank by more than five million in the last decade as its birth rate dropped. The country is also still affected by the one-child policy enacted in the late 1970s to control its rapidly growing population. Coupled with rising wages, automation presents a solution to plug the labour supply gap while also delivering cost savings.
Case study: The changing face of healthcare and the move to discretionary treatments
With longer life spans, there is a longer period where the functionality of the human body declines, thereby increasing demand for a wide range of healthcare products and services. As more people move into older age brackets, total spending (private and public) on healthcare will continue to rise, creating opportunities for companies to serve these customer groups.
For example, orthopaedic manufacturers can expect to see growing demand for hip and knee replacements. Private hospitals, care services and drug manufacturers are also positioned to see rising demand. Importantly, given the increasing wealth and disposable income of the older population, they will also purchase discretionary treatments such as ophthalmic (eyes) and audiology (hearing) products, which can improve their quality of life.
However, ageing populations can create challenges for healthcare systems which, as Covid-19 has shown, come under pressure alongside government budgets. Healthy ageing will therefore become an increasing priority, as will the call for greater investment in preventative healthcare, which can ultimately decrease overall healthcare costs for society. This creates a favourable backdrop for areas such as diagnostics, which help in identifying illnesses and treating them early.
Case study: The beauty industry
As populations age and the number of seniors increases, the older cohort becomes a major consumer group representing a multi-trillion dollar market. This group tends to have more spending potential given their high incomes compared to younger cohorts (especially in OECD countries) and higher health and personal care needs.
Silver economy spending power across regions
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Source: World Data Lab, https://worlddata.io/blog/silver-economy-richer-older> and https://worlddata.io/blog/silver-economy-asia.>
The consumer discretionary space has the potential to offer a number of opportunities for investors looking for exposure to this ageing demographic trend. Conlumino, the retail research group, estimates that in the UK alone, spending by over 65s amounted to over 15% of the total market over the past few years.
As a result, many businesses have started hiring older models to more authentically appeal to wealthy older customers. The beauty industry is an interesting example: Lombard Odier estimated that women over the age of 50 spend three times as much on skin care as younger women and they tend to use more and higher-priced products. Initiatives targeting mature consumers have become far more commonplace in recent years. This trend is further reinforced by the increasing labour force participation of women.
Over recent decades, the middle class has grown exponentially. After reaching the first billion at the end of the 1980s, it took more than 20 years to add another billion to the middle class, but only around eight years to add the next 1.6 billion. This growth shows no signs of slowing, with the latest estimates placing the total population of the middle class at around 5.2 billion in 2030 (1.6 billion more than today), which will represent some two thirds of the world’s population.
Most of the new entrants will come from the developing world, particularly Asia. This provides support for a wide range of discretionary products from phones to fashion and electronics to automobiles, boosted by the trend of ‘premiumisation’ where consumers trade up for superior products as incomes rise.
Case study: Growing wealth drives demand for financial services
The financial sector is also well positioned to benefit from the growing middle class, as incomes grow, urbanisation expands, and more people are brought into formal employment. This increases demand for financial services, such as bank accounts and loans, and much of this demand will come from the currently unbanked citizens. Growth prospects for insurance providers are also good as ageing populations purchase health insurance and pensions, and, people in emerging economies seek insurance solutions from private companies given inadequate state social safety nets.
Credit penetration as % of GDP vs GDP per capita
Source: World Bank, 2019. Note: Icons in orange denote countries regarded as being ‘EM’ – in line with the classification determined by MSCI. Shown in USD PPP.
As the demand and competition for key services and finite resources intensifies with more people joining the middle class, the challenge for businesses will be to meet this demand while protecting the long-term sustainability of people and the planet. It is undeniable that in the past 50 years, global consumption has been exerting increasing stress on the Earth’s ecosystems. In general, consumers are growing more aware of sustainability issues and making more conscious purchasing decisions, with most younger people saying they are willing to use their power as consumers and investors to affect change. The new consumption patterns born on the back of these considerations will both benefit and disrupt several sectors, crystallising the need for an ongoing focus on sustainability.
Over the past few centuries, we have seen a dramatic increase in population and this trend is set to continue. By 2100, the global population could more than double the 5.3 billion in 1990. The overwhelming driver of this growth are developing countries. There is also a general trend for urban populations to expand at the expense of rural populations. Both these patterns are having a significant impact on the demand side of the global economy, creating opportunities for companies to expand sales and earnings in growing global marketplaces.
However, a growing population has its own set of challenges as it raises demand for resources, such as food, water, arable land and energy, contributing to climate change. To help meet this demand, companies are producing sustainable fertilisers and pesticides. They are also developing precision farming techniques, which involve increasing crop yields by using technologies such as soil analysis, drones and other sensors to recommend highly tailored farming practices for each plot of land depending on the soil type, aspect, microclimate and so on.
Global water demand is projected to increase by some 55% due to growing demand from manufacturing (+400%), thermal electricity generation (+140%) and domestic use (+130%). To meet this additional demand, governments and businesses will need to invest in water solutions including water treatment, filtration, irrigation, drainage and more advanced monitoring and distribution systems. The vast majority of water is used for agriculture, so attention will be turned to making water use in food production more efficient, especially as more food will be needed as the population grows. But there will also be opportunities for solutions that increase water efficiency in industrial settings and improve water delivery to those with limited access.
The world economy is expected to be four times larger in 2050 than it is today, and it will need 80% more energy without new policy action. In addition, it is essential to reduce dependence on fossil fuels in order to limit global warming. The energy industry will therefore have to go through a significant transformation over the coming decade. There will have to be significant investment in renewable energy sources, with wind and solar set to be the largest beneficiaries. Currently, only 1.2% of global energy is produced from wind and solar, but that could rise to 70% by 2050. Companies that develop carbon capture and storage technologies and batteries could play an important role as fossil fuels are phased out, while natural gas should feature as part of the transition to renewable power generation.
The world is changing rapidly and we can identify three demographic trends at play: we are living longer lives, with life expectancy rising; we are living better lives, reflecting expanding middle class wealth; and global population continues growing, translating into more lives on the planet. These changes can be expected to play out with a greater level of certainty than the macroeconomic trends on which many investment strategies are predicated. Their economic impact and resulting investment opportunities are huge, with potential to impact businesses across all sectors. Sustainability considerations must be closely interwoven with investments seeking to capture the benefits of these shifts in such a way to create long-term, attractive returns for clients.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes.