By Michael McMillan, CFA
On 31 October 2011, the world population surpassed 7 billion people. As inhabitants of Earth first, and investors second, should we be concerned?
According to economist and demographer Richard Hokenson, founder of Hokenson & Company and a keynote speaker at the CFA Institute travelling conference Investment Opportunities and Risks in Africa, the answer is no. Instead, we should be concerned that the world population is projected to shrink as it ages — and as a result the global labor force will soon be declining.
Consider the following statistics about world population growth that support Hokenson’s thesis:
- The population growth rate peaked in 1972 at 2.1% and is currently estimated at 1.9%.
- Approximately 26.3% of the world’s population is younger than 15 years old; 65.9% is between the ages of 15 and 64; and 7.9% is 65 years or older.
- Labor force participation (i.e., the percentage of the total population 15 years and older) peaked in 1990 at 66.5%. In 2009 it was 64.7%.
So what are the economic and investment implications of these trends?
For Hokenson, the data suggest that we should expect low interest rates, slow nominal GDP growth, and the risk of deflation in more developed countries. In his recent interview with CFA Magazine, “The Race to Zero,” Hokenson discussed the strong causal relationship between labor force growth and nominal GDP growth. He finds that countries with low population growth and aging populations have slow labor force growth — and that in turn leads to slow nominal GDP growth, which holds down nominal interest rates and creates a structurally disinflationary environment with risks of deflation.
Unfortunately, a slow-growth, low-interest-rate, deflationary environment does not bode well for pension plans, and we can expect the gap to widen between portfolio yields and the returns required to fund long-term liabilities. It also does not bode well for individual investors who are either approaching retirement or are already retired and who need income-producing assets to support their lifestyles. These factors suggest that both institutional as well individual investors must seek out and invest in riskier assets to achieve the higher returns that they need.
Which leads us to the bullish case for Africa: Hokenson is optimistic because many of the burdensome demographic trends that are affecting more developed countries are not present in Africa. For example:
- In Africa, new workers as a percentage of the global labor force are expected to reach 30% in 2020, up from 12% during the 1980–1990 period. Although Asia had the highest percentage of new workers (70% in the 1980–1990 period), the ranks of Asian workers are expected to decline to roughly 58% by 2020 due to low birth rates.
- In Africa, 41% of the population is less than 15 years of age, versus 27% for the world at large, and 16% for more developed countries. Similarly, only 4% of the African population is over the age of 65, versus 8% for the world, and 16% for more developed countries.
- Africa also has the highest total fertility rate in the world: 4.7 births per woman, versus 2.5 births per woman for the world, and 1.7 for developed countries.
- Equally as important, the proportion of the African population with secondary and tertiary education is forecasted to increase significantly by 2050.
So what does all this mean from an investment perspective? It means that Africa represents a source of above-average investment returns for investors. According to Hokenson, population and labor force growth in Africa suggest that:
- Nominal GDP growth will be higher than in the rest of the world and in more developed countries in particular.
- Higher nominal GDP growth will generate higher interest rates and create an environment with higher rates of inflation and a reduced risk of deflation.
- Earnings of Africa-based companies will increase at a faster rate than those based in the developed world.
- Africa will become an increasingly important contributor to the revenues and earnings of companies based elsewhere.
Higher population growth, a younger population, and strong labor force growth also suggest a burgeoning middle class and a greater demand for consumer goods and services, including housing, retail goods, and technology. This is why Hokenson views Africa so favorably. He believes that the continent will be the beneficiary of aging populations in more developed countries. As labor forces in these countries decline, advanced economies will begin to outsource or expand current operations in Africa because this is not only where the labor supply is but also where there is an opportunity for higher output and productivity. This trend, in turn, will create greater demand for capital investment and infrastructure as well as property, plants, and equipment.
For more information on demographic trends, see the following resources:
- The 3-D Hurricane: Finding Opportunities in Challenging Markets: In this audio podcast, Robert Arnott describes a daunting capital market environment that will struggle to perform in the face of three challenges: demographics, debt, and deficits. He argues that the three pillars of successful investing are stocks, bonds, and low-correlation real-return assets.
- Demographic Trends and Their Investment Implication: In this video interview, Amlan Roy discusses the implications of demographic trends for geographic regions, countries, and industries. He discusses 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.