Demographic change

Demographic change is upon us. That’s not news. However, the speed of development and the breadth of consequences are hard to grasp entirely. Especially, as population aging is leading to a dramatic shift in the population structure; demographic change is now taking center stage as the economic, social, and political impact of more people living longer starts to emerge. By understanding these trends, we can gain a glimpse into the future.

In our research, we look at the consequences of the demographic transition and the effect it might have on economic growth. We explore how investors can make the most out of these changes and, using the right strategies, how to transform the upcoming challenges into long-term investment opportunities.

Demographic change will vary widely worldwide. While aging will continue rapidly in some regions, others are still in the early stages of a much less pronounced aging process. Population growth will vary significantly as well, with continued high population growth in Africa and population declines in Europe and Japan.

The rapid population growth of the last 75 years has generated various resource and environmental challenges. But in recent decades a challenge of a different kind has emerged: population aging is leading to a dramatic shift in the structure of populations. Longer lives and smaller families inevitably change overall population structures and social systems. We are moving away from the traditional “population pyramid”, a structure that has existed for the better part of demographic history. Countries transition from one stage to the other – from pyramid all the way to urn – at their own pace. The important questions to answer are: What are the population structures? and how do they manifest in different countries? What is their impact on the economy? We explore four different shapes of the demographic change below:

Population growth, aging, and urbanization are robust and predictable long-term demographic trends. They will persist through economic cycles and periods of political uncertainty alike. While in some areas the impact of demographic trends is foreseeable – no one doubts that healthcare services will be in high demand in aging populations – in other areas the exact economic and financial market impact will depend on how policymakers, central banks, and societies as a whole respond to these challenges.

Given these uncertainties, demographics should influence but not dominate long-term investment decisions. When investing in an environment of changing demographics, the composition of the portfolio should be carefully reviewed. International diversification, which aims at benefiting from different demographic stages across countries, should be a prime focus.

Investors holding government bonds of countries with rapidly aging populations and high debt, or fiscal and current account deficits, should assess whether the potential returns sufficiently compensate them for the underlying risk. We expect these countries to encounter more difficulties in expanding their economies, paying their debt, and financing their pay-as-you-go pension systems. We recommend investing in equity markets that benefit from the growth of younger populations or the transition to the consumer economy. But it is not the demographics of the company’s country of domicile that matters; it’s the demographics of the markets the company serves.