Demographic Trends: Key to Long-Term Global Investing

Because demographics can help make or break a country’s economy, investors should pay attention to country-specific demographic trends when considering long-term investments in the global market. The “long-term” is stressed in the preceding sentence because demographic changes are relatively slow in the making; thus demographics are not especially helpful for short-term trades.

When considering demographics, more than just birthrates and population growth need to be examined, as all population characteristics–such as death rates, life expectancies, migration trends, median ages, and populations by age groups, to name a few–can impact the economy. Demographics is not an exact science with absolute numbers and is therefore not a perfect tool for gauging a country's economic prospects, but it does serve as a good barometer for the potential future strength or weakness of an economy.

The four tables below segmented into quadrants compare the relative strengths and weaknesses of both emerging and developed countries based on their demographic profiles (the tables also include the 2009 estimated population growth percentage for each country). “The four quadrants of demography” was developed by Laurence J. Kotlikoff and Scott Burns and described in their 2004 book, The Coming Generational Storm.

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In their original quadrant, the authors set the life expectancy parameters at 60 and a birthrate of 2.1. We have tweaked these to a life expectancy of 80, as this is nearly the norm in the European Union (developed world) and the growing likelihood of many countries raising their retirement age.

The findings are similar to those of Kotlikoff and Burns: two quadrants of “Malthusian Hell,” one the traditional version caused by high birthrates and low life expectancies, and the other a postmodern version with a low birthrate and low life expectancy; another quadrant of major upheaval–the “Decrepit Quarter”–caused by a low birthrate and high life expectancy; and the last, with high life expectancy and low birthrate, but a birthrate high enough to create a possible “Panglossian Balance.”

We realize there are many ways to skin a cat and some readers may disagree with our new parameters. However, we believe the findings show how longer life expectations and lower birthrates will radically reshape the age distributions of many countries around the globe be they emerging or developed.

Also, despite calls to the contrary, the U.S. is fairly well placed within the developed world and even has a birthrate higher than many emerging countries. Europe, on the other hand, with a birthrate much lower than that of the U.S., is on course for dramatic changes over the coming generations.

The most dramatic changes will be found in Russia and the former states of the Soviet Union. In Russia, both life expectancy and birth rates have essentially collapsed. Our life expectancy 2009 estimate of 66 masked the fact that the life expectancy of Russian males is 58. This combined with a fertility rate of 1.4 will lead to dramatic, if not catastrophic, consequences.

Without improvement the current 140 million population of Russia could fall to only 58 million by 2040. This is on par with what happened during the plague years of fourteenth-century Europe. As pointed out by Kotlikoff and Burns,

The only difference is that Russia, with 40 years, will have time to bury their dead.

Comments

[bigmoney:]

the four quadrants is certainly interesting. I'd like to see the numbers after factoring out immigrants, both legal and illegal. One advantage of low birthrates is reluctance for war. Families with only children just aren't going to be very eager to see them squandered in some foreign meat grinder. I'd guess that Germany, with its 1.4 BR, will be the last country to start a war for the foreseeable future.

One disadvantage is that western economies will have to back fill with large numbers of immigrants which will result in change in culture and ethnic makeup. Se Habla espanol? Hablo castinano norte americano?

Jul 11 01:40 PM