Demographics is a topic that everyone seems to opine, project, mystify and elaborate on as it is topical.
However, as an investment researcher as well as one focused on pensions, I followed Peter Drucker who said that people do not follow demographics, which is an important area, and when they do follow, they “miss the point”. For the last 24 years, in a Druckerian spirit, I have as a researcher recast the focus of demographics on two major characteristics of individuals—that as a consumer of goods and services over their lifespan and that as a worker over their working life.
This immediately makes demographics relevant to all individuals in the world – 8.2bn consumers and nearly 5.6bn workers. It, therefore, follows that demographics have an impact on all balance sheets and income statements and on all horizons: the short-term, medium-term and long-term. As consumers’ and workers’ decisions impact macroeconomic variables (GDP growth, inflation, interest rates, capital flows) and asset prices they impact investment decisions; asset allocation and investment strategy.
The popular perspective of demographics being mainly associated with age and having long-term effects only as well as the folklore that “demographics is destiny” is narrow, incorrect, and quite imprecise. Similarly, the view that it has long-term effects only and is predictable is not correct. One can simply say that a person will be 10 years older in 10 years, but it is quite incorrect to posit that they will consume and work like someone 10 years older than them. Individuals are also consumers now, not just in the future and those working are current workers.
The current global macro environment is one of low economic growth, high public debt burden and high inflation, which poses great aggregate (not sector, not country, not asset-specific) uncertainty for policymakers, investors and pensioners, workers as well as students. Aggregate macro uncertainty also contributes to systemic risks. The macroeconomic uncertainty is further accentuated by geopolitical risks that emanate from demographics, as articulated by Professor Sam Huntington in his book “Clash of Civilizations” which pointed towards the underlying causes of the 9/11 attacks in the US. The genesis of a multipolar regional world and the backdrop to the Russian invasion of Ukraine were also anticipated in the same classic book nearly three decades ago and so was a loss of the gloss of the dollar (also referred to as dedollarisation).
In contrast to the 1980s and 1990s, the first two decades of this century have seen much lower economic growth and a lot of it has been driven by EM and mainly China. The prospect of declining Chinese growth (much lower than 8%) was highlighted by us in 2008-09 but not taken that seriously. Lower global growth and lower GDP per capita growth also affect the fortunes of the financial services industry (investment banks, investment managers, insurance companies, pension funds, and investment consultants), a point I have been making since 2004. The confidence, sentiment and motivation of workers and consumers in low-growth periods are not the same as those during the high-growth periods. The behaviour of consumers and workers is affected not only by age but also by gender, race, identity, education, income, wealth etc. Age is not a summary statistic for all the demographics of an individual. Behaviour and psychology were missing elements in the macroeconomists' analysis of conditions, which caused them to miss calling the Global Financial Crisis as admitted by George Akerlof and Robert Shiller in their book “Animal Spirits”. The book highlighted the failures of quantitative macro models and frameworks to predict and forecast impending financial crises.
A few key demographic drivers underlying the investment environment are:
- Low global growth: using national macro accounting frameworks, the main components of GDP growth are (i) working age (15-64 years or 20-64 years or 20-69 years based on definitions) population growth (ii) labour productivity growth and (iii) labour utilisation growth. All three components but most dominantly labour productivity growth has been trending downwards in the advanced rich countries since the turn of the millennium; the emerging markets followed by dominant China have now joined. China’s working-age population decline set in just before or around 2010 and similar trends have followed in other parts of EM Asia. Asia, contrary to popular belief, is not a young continent any longer, but Africa still is. If we are to see increased global growth through higher labour productivity growth we must see higher female labour force participation, higher youth labour participation and innovative inclusive technology.
- High public debt burdens: this is a very common feature across most advanced ageing countries due to long-term promises on account of pensions, health care and long-term care. These promises are causing fiscal unsustainability strains across Japan, EU and the US. In the interests of intergenerational and multigenerational fairness, I think some of these promises need renegotiation to avoid huge tax burdens on smaller generations.
- High inflation: this current situation is caused by a complex of supply shocks, geopolitics, trade restrictions as well as changing demand dynamics. Monetary policy with few instruments relative to goals and in an ageing world has been less effective in meeting the targets ever since the GFC. A combination of prudent fiscal policy in coordination with monetary policy and proactive structural changes is needed for inflation to come down. It has been coming down but the watchful eyes of the Powell Fed and the Lagarde ECB are rightfully cautious.
Demographically driven low economic growth, high public debt, high inflation affect interest rates, yield curves, revenues and profits, equity premia as well as influences risk appetite thereby impacting the investment universe as well as risk adjusted returns. So where should investors look for risk adjusted returns?
Q1: Which countries look demographically promising?
Smaller countries with quicker policy making and policy execution and those considering holistic policy changes (education, labour force, technology, health, retirement) such as the Nordics, Singapore or New Zealand. Additionally, countries with huge growth potential from low levels of growth and investment like Rwanda, Kenya etc. who are using technology to broaden financial access for the entire population.
Q2. Which sectors are demographically advantaged?
- Pharma and biotech
- Financial services
- Leisure and luxury
- Infrastructure
- Natural resources
- Emerging markets
Conclusion
The world of investments and macroeconomics would be better off listening to what arguably the biggest management guru and pensions guru Peter Drucker said: “pay more and better attention to demographics”.
I have tried to adopt that in my research for global clients and articulated it in my book “Demographics Unravelled”.
