Investment Strategy:  Third Quarter – Demographics – The Rising Tide

Demographics – The Rising Tide

Investment Manager James Tuson discusses an every growing population in an ever shrinking world.

There are few presenters who readily stick in my mind who have had the ability to convey an interesting and enjoyable message about a potentially heavy-to-digest topic. Two stand out. Ian Bremmer and his discussions on geopolitics is the first, the late Hans Rosling on demographics being the second; who challenged pre-conceived perceptions on demographics, population growth and poverty. If you are too weary to continue reading, I commend the following:

I have the good fortune of having a sister who lives in Australia. Good fortune I hasten to add, not because I don’t get on with her – far from it – but good fortune because it allowed the opportunity to embark on a rather pleasant two week jaunt around the world’s smallest continent. Our adventures briefly took us to the sunny, northern town of Port Douglas; a sort of ‘Salcombe-on-Barrier- Reef’, where the boat reigns supreme and the people convey a certain ‘well-to-do’ manner all wrapped up in a ‘no-nonsense’ Queenslander attitude. Having delivered us back to dry land one evening, our friendly skipper of the local mangroves tour regaled, with only slightly diluted hubris, how the weather was set fair at 26°C and sunny until October. It being only April, I began reflecting on the typical British summer I would be flying back to and contemplating how anyone can start a piece on demographics, only containing my jealousy at the slightly sobering sight of a 12 foot croc eyeing us up from across the shore. “Would you ‘Adam & Eve’ it?” I thought, “Would you Adam & Eve it?”

Wherever it all started, the current global population picture is straightforward. We are a growing population in what feels like an ever-shrinking world. What Gapminder, a Swedish foundation set up to challenge misconceptions about global development, argue for is a shift in the pervading 1960’s world view – which sees a small number of rich developed countries and large number of poor developing ones and not much in between – to one which recognises that the last 50 years have seen a transition where huge swathes of the developing world and their populations have been lifted out of poverty and become educated, wealthier and healthier. This has resulted in a global population picture where the gap between rich and poor may be as big as ever, but the largest numbers of people now live in an emerged middle-income country.

So how do populations boom? As the health and wealth of a country and its people grow, it enters successive phases of a process called ‘demographic transition’, seeing a shift from one stable population level (characterised by a high birth rate & high death rate) to another stable population level (characterised by a low birth rate and a low death rate). In between these stages the population soars. Globally, we are in between these two stages and experiencing rapid growth, with more than twice as many people on the planet today as there were in 1960. World population has never doubled this quickly before and, as fertility rates fall, is unlikely to ever double again with the UN forecasting total global population capping out around 11 billion in around 2100.

At a country level, however, a far more diverse picture emerges in which the “West’s” domination is over. However, challenges remain at both ends of this transition. Whilst the total number of people living in extreme poverty has fallen significantly, particularly in Asia, according to the World Bank over 90% of remaining global poverty is concentrated in countries whose populations are young and growing rapidly, whereas over 85% of economic activity takes place in countries that have much lower fertility rates and increasingly elderly populations.

The West is dead….

For the ‘developed world’ facing declining populations, the ‘winners’ of the future are likely to be those countries that can adapt to become the most flexible (and welcoming) in attracting a young workforce to boost their own domestic production levels, contribute to the tax system, start families and preferably create a self- sustaining counterweight to the baby boomer bulge. You can knock London for its concentration of jobs in the finance sector, but walk the streets, get on a bus or a tube and you can immediately hear how powerful the economic draw of a ‘global-city’ can be.

Germany’s decision to open its doors in the face of 2015’s migrant crisis, whilst primarily borne out of humanitarian duties did, however, have the secondary impact of arresting Germany’s population decline – at least temporarily. As Vitor Constancio, VP at the ECB, was quoted as saying Europe needs to find solutions in order to stop committing “demographic suicide” and “To change demographic trends, promoting birth is not enough. It has to be done through immigration. If not, we’re creating a great difficulty to growth”. The current political climate represents a barrier to this.

As the poster child for poor demographics, Japan offers examples of the potential impacts in failing to manage an ageing, declining population. The Japanese population is peaking around now and is forecast to steadily decline over the next 100 years, from its current 127 million or so to less than 60 million by 2115, shrinking 20% in just the next 35 years alone. With a birth rate far below the required rate that would signal a stable population number, coupled with strict immigration laws that have limited the number of foreign born residents to just 2% (in 2016 it was around 15% in the UK), Japan faces significant challenges as it tries to balance an ever-smaller pool of younger workers from which tax can be extracted, with a huge public debt pile whose interest payments continue to need servicing. Working for longer, increasing the number of females in the labour force and less generous state pension entitlements are a ‘conversation’ many governments will be having with their ageing electorates.

This applies to companies as well. If you are a global company, you want to base your office/factory locations in places where the resources to produce your product/service are plentiful and that (still) requires a plentiful supply of human beings. Unsurprisingly, a declining working age population isn’t one of the criteria Amazon is seeking as it sorts through proposals from eager cities on where to position its second headquarters; a decision that would spur a $5bn investment from the tech giant and 50,000 high paying tech jobs.

With scientists increasingly getting a better understanding on the factors that help aid longevity in humans, a child born today faces the prospect of living to 120. (This, scientists also now believe, being the minimum age required for any English child to witness their team winning the World Cup…). Rising ages will bring an obvious need for increased healthcare and wealthcare, but also represent a broader headwind to economic growth. Analysis on consumer expenditure habits in the US show that annual household spending falls by almost 50% from its peak by age 75 – that’s a problem when 70% of your economy is consumer-spending led. The increased savings requirement of an ageing population also means a reduced amount of potential capital is available for business investment, which in turn can spur economic growth, in comparison to a more youthful population.

A declining workforce in the ‘developed’ world combined with a 40 year downtrend in productivity growth and high levels of debt, mean economic growth will find itself curtailed under the weight of these forces. In turn, these will combine to limit central banks’ ability to raise interest rates and should keep a lid on inflationary forces.

….Long live the Rest

We are living in a world of relentless change. One with huge migrations of people, moving to increasing numbers of mega-cities, raising soaring skyscrapers and giving birth to sprawling slums. With these changes comes an insatiable appetite for fuel and food; for steel and cement; for jobs and commerce. By 2030, the UN estimate that 60% of people globally will live in urban areas, with 1 in 3 living in cities of more than half a million people. Of the existing cities with populations in excess of 500,000, the average growth rate is 2.4%, but there were 47 cities which saw average growth in excess of 6% p.a. and 46 of these were in Africa (6) and Asia (40, 20 in China alone). From here on in, the developing world will account for more than 95% of future population growth.

The result of this is likely two-fold:

– Increased need for infrastructure:

Not only will cities need to be built with their accompanying homes, schools, hospitals and everything in between, but the economic drivers to create jobs alongside homes need building too – and they’re thinking big. Eye-wateringly massive projects such as China’s ‘Belt & Road’ initiative which, if it comes fully in to fruition, plans trillions of US dollars investment in infrastructure and trade routes to enable an integrated pan-Asia/Eastern Europe economic area. Leaving aside the geopolitical implications and practical difficulties in achieving this, the potential arises for a transformative economic bloc far from Europe’s and the US’s shores.

The rise of the consumer:

With more jobs and rising wealth come a rising number of middle income families with middle income spending habits, centred on the consumption of goods and services, whether it is cars or phones, toothpaste or washing powder, or banking and insurance. What we will witness over the coming decades is a shift East when it comes to global spending habits. This not only explains why the existing global brands attach such importance to developing connections and networks in these future powerhouses of global spending, but also why those ‘local’ companies that can facilitate that spending have seen their values surge (Baidu or Tencent & Alibaba being the Chinese equivalent of Google and, Amazon). These shifting sands have been progressing for decades, but we can expect the pace of that change to get ever faster as their young populations mature in to consuming adults. In 1975 only 30% of “the rich” (loosely defined by those who can afford to fly abroad on holiday) lived outside the EU and North America, today it’s 50/50 and by 2035 70% of the rich consumers will be non-EU/North Americans. In time, this creates the potential for a self-fulfilling economic prophecy of inter-regional success through the increased movement of trade and tourism – a shift already underway if the numbers of Chinese who followed in my footsteps with a trip to Oz continues, where there are now almost 3 times the number of Chinese short-term visitors than there were just 10 years ago.

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