Profitable investing in an ageing world
The rapid ageing of the world's most advanced economies makes for both economic challenges and potential investment opportunities. According to a recent study by the United Nations, the ageing demographic is a “megatrend that is transforming economies and societies around the world”. Investors take heed. In the United States alone, the number of older people is projected to increase by 135 percent from now until 2050 while the size of the population over 85 years old is projected to increase by 350 percent.
While much has been made of America's ‘baby boomer' population now approaching their golden years, the ageing phenomenon is not unique to the US. In fact, most of the world's largest developed countries are steadily growing older. On a global basis, number of elderly is expected to increase to more than two billion by 2050 according to the United Nations report. Unlike many other economic forecasts, demographic prognostications are generally very accurate.
One reason for the projected exponential growth in the number of elderly is due to the simple fact that people are living longer. In 1900, the average life expectancy was just 47 years, but that has risen to 78 years today and is forecasted to be 84.5 years by the year 2050. Advances in medicine, better access to healthcare services and improvements in diet and hygiene have contributed vastly to longevity. Open heart surgery, for example, was once highly risky but is now considered routine.
An important secular factor leading to the increasing number of elderly is the steady advance of the ‘baby boomers', who represent a disproportionately large slice of the developed world's population and of America's in particular. Boomers, technically defined as those persons born during the post-war era between 1946 and 1964, are children of parents who returned home from two wars and typically created larger families than we see today.
The boomers are not just important statistically but also represent a group of people known for setting their own trends in a meaningful way. According to the American Association of Retired Persons (AARP): “In 2011, the first of the baby boom generation reached what used to be known as retirement age. And for the next 18 years, boomers will be turning 65 at a rate of about 8,000 a day. As this unique cohort grows older, it will likely transform the institutions of ageing — just as it has done to other aspects of American life.”
Adding to the significance of the ageing trend, and otherwise impacting economic growth rates and government budgets, is the birth rates of the world's largest economies, as couples choose to have smaller families. In other words, a declining proportion of the population under 65 is increasingly less available to support the seniors. The number of working-age Americans for each retirement-age person, or the “dependency ratio”, is projected to fall from 4.7 currently to just 2.6 by 2050 according to the OECD website.
Older citizens typically do not work and require a higher level of social services. This means increasing budgetary pressure on programmes such as Social Security and Medicare in the US and similar programmes in other countries. More recently, the inconvenient trend has contributed to the heated debate over the America's Affordable Care Act (ACA), also known as ‘Obamacare'. Younger people are not signing up to pay for insurance programmes more likely to benefit older folks!
With such a pervasive and long term secular trend gaining momentum each year, investors would be wise to pay close attention to its economic impact. Equity investors should consider more carefully those sectors likely to benefit. Healthcare services, pharmaceutical and medical device makers, the leisure industry and wealth planning are industries likely to see increased activity.
In terms of overall national growth rates, ageing economies without a strong immigration policy could continue to struggle. After all, a nation's economic growth rate is largely a function of an increasing workforce and the productivity of its workers. Countries such as Germany and Japan will have a difficult time growing their economies in the face of their ageing populations and a resistance to immigration.
America and the UK are also facing a similar demographic dilemma but at least have more progressive immigration policies. Bermuda, an ageing society with almost no immigration plan, likely faces a long road ahead.
On the other hand, many developing countries in South America and parts of Asia are poised to see a rising workforce on the back of higher average birth rates and better overall dependency ratios. Companies which can successfully market to these growing populations are worth considering.
In the fixed-income market, the ageing trend creates several important cross-currents. On the plus side, a maturing workforce generally translates into lower growth rates and contained inflation which is generally good for bonds. Indeed, the near zero rates presently offered on short-term fixed-income securities are largely a result of governments attempting to stoke their domestic growth rates in the aftermath of the Great Recession.
While slower growth may be a positive for bonds, poor sovereign credit ratings remain an issue. Even now, five years after the Great Recession, most governments are still struggling to cover massive budget shortfalls. Those debts have at least partly been incurred by the escalating fiscal demands caused by an older society. Last year, the S&P credit rating agency cut its rating on the Netherlands, France and the European Union. France's rating was reduced last November with the agency citing ‘constrained fiscal flexibility' and ‘the government's inability to significantly reduce total government spending'.
Pimco, a major asset manager and pensions fund advisor recently stated: “Over the medium to longer term, the demographics of ageing populations are likely to collide with rising and unsustainable public-sector debt levels in many areas of the world.”
In terms of investment strategy, we believe fixed-income investors should consider underweighting less creditworthy government bonds, even those issued by so-called developed countries. In the LOM Fixed Income Fund, we have been underweighting most direct sovereign credits while adding to positions in newly industrialised economies and those backed by well-positioned corporations. In our equity strategies we remain overweight the healthcare sector, an industry benefiting from both technological innovation and the ageing trend.
Bryan Dooley, CFA is a senior portfolio manager at LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information.
This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.