As they say, demographics is destiny. Just ask Japan. The longer your investment horizon, the more exposed you are to demographic trends. Population forecasts are based on fertility rates and age pyramids; estimates are easily accessible from the UN - Population Division.
Population trends are important because they help us to estimate a growth rate in our valuations. Putting a valuation on growth is probably one of the most important tasks in valuing a company. Here in the U.S., the population has risen steadily by about 1.1% since 1950. Coca-Cola (NYSE:KO), as an example, will sell more Coke when there are higher growth rates and this will be reflected in KO's valuation. In many valuations, analysts calculate a terminal value based on a small, positive growth rate. If the population is likely to shrink over time as it is in many parts of the world, then this terminal value will be too high.
This article is really about painting a picture of where we are and where we will be by 2050, a generation from now. Figuring out where populations will grow the largest will yield good investment insight. It is the starting point for having a clear perspective into how the world is developing.
Present and Future Population Levels
You can see from the table above that Asia has far and away the largest population today, representing 60% of the world's total. China obviously leads Asia as the most populated country in the world. Notice that China's population is expected to decline by approximately 15 million people from current levels by 2050 mostly because of its family policies that affect the replacement rate of the population. Asia's share of the global population will continue to be strong, though, and will mostly be driven by population growth in India, which is expected to add approximately 350 million more people relative to current levels. Japan's population is expected to decline by approximately 15% from current levels by 2050; keep this in mind when projecting growth rates for companies operating there. China declines slightly, India keeps growing significantly, and Japan declines.
Europe has about 10% of the population currently and is expected to actually decline by about 5% in the next generation. Although many developed countries are expecting a decline in their population, the United States is actually expected to grow its population by another 75 million people, a difference of about 23% over this next generation. This is another reason why the U.S. continues to be one of the best countries to invest in around the world.
Perhaps the biggest surprise to many is the expected growth in population from Africa. There are currently about 1.2 billion people in Africa, or about 16% of the world's population. This population is expected to double by 2050, adding more than 1.25 billion people. This could make Africa a key growth engine for many multinational companies especially if productivity levels improve and a bigger middle class emerges there. Growth in Africa is led by Nigeria, already home to 184 million people. By 2050, Nigeria is expected to add another 250 million people, making it the fourth most populated nation on earth after the United States. Nigeria is an important nation in Africa today, producing much of its culture and is a leading exporter of oil resources. It is said that Nollywood is second only to Hollywood in the number of film productions produced each year.
Of course, population growth does not guarantee significant economic growth. There are many factors that contribute to economic growth, many of which we take for granted in advanced economies: efficient access to credit, effective and productive courts, respect for property rights, skills embedded in the work force, etc. Countries that lack some of these attributes might find themselves hindered in their economy's risk-taking and performance.
You'll notice that 21% of the world's population, the top five economies, produces about 53% of the world's output. As the rest of the world improves its productivity, this percentage should decline.
The story of this next generation is the story of an emerging middle class in the rest of the world outside of many of the traditionally developed countries, such as the United States. For another perspective on how these trends will develop, please see Dr. Thomas Barnett's briefing presentation to U.S. government officials titled "The Pentagon's New Map." It is a great presentation on how both the economic and sociopolitical trends are likely to play out over these coming decades.
Our above chart shows the annualized population growth rates that are expected for key areas of the world economy. The U.S. is expected to grow its population at 0.6% per year until 2050; that is about half of the growth rate it experienced since 1950. If you believe that productivity has also slowed down in the U.S., then expect U.S. economic growth rates to be lesser going forward than they were in the past. Analysts tend to project a continuing trend into the future and may overestimate U.S. growth rates if they do not take this analysis into account.
Furthermore, we can see that places like Africa and India are macroeconomic stories to watch. If productivity levels in these economies also grow during this generation, then you can expect sizable returns from companies that operate there.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.