Investment The demographic shift

Monique Frederick, Butterfield

The mood of investors seems to be more upbeat than it was last year. This was quite noticeable at the World Economic Forum held in Davos, Switzerland in January. There may be good reason to be more optimistic. The tail risks (downside risks) we were concerned about last year have been significantly reduced globally.  

For example in the United States both the elections and the so called fiscal cliff are behind us – although sequestration and the debt ceiling debate are still unresolved. In Europe the chances of Greece or another country being forced to exit the Eurozone has decreased dramatically and in Asia the fears about a hard landing in China did not come to pass.  


Renewed optimism or pessimism?  

With last year’s worries in our rearview mirror, the market is focusing on the “news du jour” – sequestration in the US, earlier monetary tightening by the Fed and currency wars. Some investment strategists are very optimistic about equities, while a few believe that the high company valuations we became accustomed to during the tech bubble period may never return. As is always the case in life, someone will always be right at some point in time and someone (or many) will be wrong. Although reasonable arguments are presented by both believers and non-believers, it will be years from now before we can award the “you predicted it” trophy. Many factors will impact the final topography of the global economic landscape. Apart from monetary and fiscal policies another driving factor will be the shift in demographics. 


An ageing developed world  

According to a United Nations report, persons over 60 years of age account for 11 per cent of the world’s population and that number is projected to rapidly increase to a whopping 22 per cent by 2050. Developed nations lead the way in the global ageing trend with one in five persons in Europe above the age of 60 compared to one in 9 persons in Asia, Latin America and the Caribbean and one in 16 persons in Africa. In the US the oldest baby boomers, born between 1946 and 1964, turned 65 in January 2011, and since then 10,000 baby boomers a day reach the official retirement age, according to Pew Research Center.  

Throughout history, changing demographics have resulted in major shifts in top industry rankings. With the rapid aging of the population, the demand for prescription drugs and health care services, and advanced medical technologies will reach unprecedented levels in the next two decades. Therefore sectors such as healthcare, biotechnology, and cosmetics should benefit from this trend.  

Of course not all companies in these sectors are created equal and other factors including but not limited to government regulations, austerity measures and individual stock valuations will affect their performance. If you’re not confident in your ability to predict the next big innovator of medical technology, you can gain exposure to the biotech sector through an exchange traded tracker.  

There is also an array of broad-based healthcare ETFs available in the market. Although the healthcare related industries are obvious beneficiaries of a graying population, the survival of companies in different industries (ie technology, consumer discretionary etc) will also depend on their ability to service the needs of the elderly. 


A young & growing emerging market population  

In emerging markets a young and growing population will foster higher productivity and higher potential growth as the younger generation joins the labor pool. Emerging markets will also be the source of the world’s future talent pool and labor force, while the working age population declines in more developed nations.  

Moreover, the middle class in these markets is growing and is expected to continue on this upward trend. Admittedly, a burgeoning population does not automatically guarantee higher growth without policies to increase education levels, provide proper health care and a trade friendly environment.

Consequently, there will be both winners & losers in terms of which emerging economies will prosper. Despite this uncertainty, we can expect that in general emerging markets are well positioned to perform better than developed markets and companies that are able to capitalise on the shift in global demographics will perform better than their peers. 

To implement an investment strategy based on this theme investors should consider global companies that generate a significant part of their revenues from emerging markets. Local emerging market companies should not be overlooked as they too will benefit from the anticipated ascent in emerging-to-emerging (E2E) trade. 


Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited. The Bank accepts no liability for errors or actions taken on the basis of this information.