Savour International

Demographic changes influence economic and social developments not just over the long term, but will also do so in the immediate future. This year, the number of working-age people throughout the world will decline for the first time ever. Climate change, natural resources, geopolitics, urbanisation, economic growth, tax revenues, inflation, payment balances and investment returns are all affected by this sea change.

Steady increase in the number of senior citizens

The causes of a prolonged lifespan are well known: As a society’s prosperity increases, so does the average life expectancy, even as the number of children per woman (fertility rate) declines.

Since 1950, the average life expectancy in industrialised nations has increased from 66 to 78 years. In the emerging nations, that figure has risen from 42 to 67 years over the same time frame. This remarkable trend is mainly the result of better access to basic medical care, improved personal hygiene and a broader range of foodstuffs. Also, hard physical labour has progressively become the task of machines rather than human beings.

This longer life expectancy leads to the fact that, by 2050, the world’s population will have increased by 2.4 billion to a total of 9.3 billion people. Moves to secure the necessary natural resources are already underway in the energy sector and in terms of agricultural land. For example, a South Korean company is attempting to obtain a 99-year lease on 1.3 million hectares in Madagascar alone. That represents close to half of the country’s arable land.

But with prosperity comes also a decline in the birth rate. The number of new-borns per woman (fertility rate) has halved since 1950. This is mainly attributable to the changed role of women in society. Fifty years ago, only one in three employable individuals in the industrialised nations was a woman. Since then, the proportion of women in the labour market has increased steadily and now stands at just under 50%. In addition, the decrease in infant mortality has allowed the birth rate to decline. The result: lower population growth rates in the industrialised nations compared to the emerging nations.

The “baby boomers” of the post-WWII era are now at retirement age; hence the number of senior citizens will grow at a significantly faster pace than the number of able-bodied workers.

Economic consequences of longer life expectancy

Employment is the key factor in a society’s ability to produce goods and services. Thus in the past, the surging workforce was a major pillar of economic growth. Employed people generate income, buy things and build houses.

In the industrialised nations, the demographic turning point has now been reached. The proportion of working-age people in those countries is no longer on the rise, but instead will decline from now on. The emerging nations will follow their Western counterparts with a considerable time lag. However, economic growth is the most important driver of long-term real returns: net new investments must generate at least the equivalent of real interest rates in order to pay off. From an overall economic standpoint, this is only possible over the long run if real interest rates do not exceed the rate of economic growth. Thus the currently low level of real interest rates also has demographic grounds and is likely to persist for quite some time.

Other consequences can also be expected:

• There will be changes in saving behaviour and hence in the availability of financial resources for new investment.
• Investments of the sizeable sums of retirement capital will increasingly be made in the emerging nations, because there capital investment projects are taking place that generate the necessary returns.
• Also, the departure of older, more experienced workers can mean that valuable know-how is lost, which in turn can have a negative effect on productivity – the solution here is to be had from training and human resource service providers, outsourcing companies and automation specialists.
• The ratio of workers to senior citizens (dependency ratio) will leave noticeable marks on national budgets; lower tax revenues from occupational income will stand in stark contrast to higher outlays for social and healthcare costs – the same effect will impact the pension system as well.
• Costs for healthcare will increase sharply, as will those for consumer goods relative to investment goods because pensioners will be drawing on their capital reserves and investing less – thus the  composition of gross domestic product will be reweighted.

Therefore, even allowing for appropriate economic policy responses, demographic tidal changes do not evolve without consequences for the affected economies and hence investors.

Ageing as an investment opportunity

Going forward, the senior citizen age group will represent a rapidly growing segment. Alone from today (760 million seniors) through 2020 (1.030 billion seniors), the growth rate will amount to 36%. By 2050, this age group should increase to more than 2 billion people.

The healthcare sector stands to benefit the most from this trend. In Switzerland for example, pensioners account for 16% of the population but cause 43% of the total healthcare costs. Swiss senior citizens’ annual per capita outlay for medical care amounts to CHF 8,100 – four times higher than the rest of the population. Revenues of the involved companies are therefore increasing exponentially. For medium- to long-term investors, it is advisable to have a portfolio mix of companies that participate in these areas.