By Michael McMillan, Ph.D., CPA, CFA
To be successful, global investors must understand demographic trends and the implications for geographic regions, countries, industries, and even companies. But according to Dr. Amlan Roy, managing director and head of global demographics and pensions research at Credit Suisse (CS), demographics is all too often misunderstood and misinterpreted — and its importance is underappreciated by investors.
As Roy put it to delegates at the Second Annual CFA Institute Middle East Investment Conference in Abu Dhabi on March 22, "Does anyone pay taxes? Are you affected by inflation? Does your healthcare matter? Do geopolitical risks matter? Does price point matter? If any of those things matter, demographics is not long-term. It is immediate, short-term, medium-term and long-term."
Of course, demographic trends are not necessarily predictable. Nor is demographics simply about age, Roy argued. Instead, demographics is about analyzing similarities and differences among consumers and workers, as well as the short, intermediate, and long-term effects of these differences on interest rates, economic growth, asset prices, housing, inflation, and government spending.
Emerging markets have young and growing populations as well as labor force participation. Developed countries on the other hand have aging — and declining — populations and labor force participation. These trends suggest that GDP growth in emerging markets will remain robust, while GDP growth in developed countries will decline. For a simple reason: Population growth and labor force participation drive consumption, which in turn drives GDP.
From an investment perspective, these observations suggest that in developed countries demand for pharmaceuticals, leisure/luxury goods, and financial services should increase as a function of these countries' aging populations. After all, new ways of delivering pensions and insurance will be demanded by aging populations, whose work-leisure trade-offs, travel, and shopping habits will change. In emerging markets, however, demographic trends are bullish for the infrastructure, natural resources, residential construction and transportation industries — which should all benefit from these countries' young and growing populations. In emerging economies, the manufacturing sector is also likely to benefit from rising labor force participation (a trend that makes it cheaper to produce goods in these countries).
According to Dr. Roy, developed countries with aging populations could boost GDP growth by increasing the participation of women in the labor force and by adopting more sensible immigration policies, although the political will is all too often lacking, he said.