Why demographics matter in investment decisions

The rise of the Asian middle class impacts investment decisions. Image source: Getty/Gallo

Digital interconnectivity or the rise of electric (and even driverless) motor vehicles are examples of long-term trends that must be taken into consideration. “We look for parts of the global economy likely to be the natural winners over time and avoid those where headwinds may build. We seek the best structural growth opportunities to underpin the portfolios’ inflation-beating returns," says Nancy Hossack, Foord equity analyst.

She explains that they pay particularly close attention to demographic trends, which is the statistical study of populations and how they change. “We know what the population profile is today and that each day everyone gets a day older, some people die and new people are born. The expected population profile through time is therefore predictable and reliable.”

According to Hossack, demographics matter for three primary reasons:

1. Economic growth depends on the size of the working age population and productivity growth;
2. People are natural buyers of financial assets in their working years (accumulating capital) and natural sellers in retirement (pension income), which affects asset prices; and
3. Consumer preferences also change — a 20-year-old today has different spending priorities than a 20-year-old of 25 years ago.

Baby boomers retiring – what this means

“The world population is ageing. The baby boomer generation (post World War II births) is retiring in large numbers — 10,000 people a day retire in the US alone.

“The healthcare sector should benefit from this demographic shift. For example, an 80-year old spends twice as much on healthcare as a 60-year old, who spends twice as much as a 40-year old.

“Healthcare spending as a percentage of the US economy is indeed rising as the population ages."

Rise of the Asian middle class

“Another related demographic shift is the rise of the Asian middle class, where populations on average are much younger. The Asian share of the global middle class will go from one third in 2009 to two thirds by 2030.

“This rapidly growing group of consumers will also have rising incomes as they progress through the working-age cycle,” says Hossack.

She concludes by cautioning that while demographic trends are critical to an investment process, it is important to keep one’s investment portfolio well balanced across diversified drivers of return, making sure that no single theme or investment idea dominates the outcome.