Demographics is a very broad subject composed of many interconnected elements. Here, we outline four key areas that are particularly relevant to investors, namely:
1. Population growth
2. The growth of middle classes
3. Changing consumption habits and behaviour
4. Ageing populations
THEME 1 : GLOBAL POPULATION GROWTH
‘More people equals more demand’
Perhaps the most obvious implication of the growing global population is that it raises demand for finite resources, including the critical ones of food, water and energy. These resources have already seen strong price increases in recent years as emerging economies have grown and begun to consume a growing share of the world’s resources.
A casual observation of supermarket food prices over recent years reveals a clear upward trend. Food prices can obviously be influenced by short-term supply factors such as harvests, but on the demand side, the key long-term considerations are largely demographics-related and they are having the effect of pushing prices higher. The World Bank estimates that demand for food will rise by 50% by 2030. This will be attributable in large part to rising global populations but also to the related factors of rising affluence and changing dietary habits. The rising meat prices of the last few years provide an excellent case study - prices have been supported by world population growth but also because people in places like China are getting wealthier which is spurring demand for more expensive food items such as meat and dairy products. Moving further back in the supply chain, we can also see that increased demand for protein has important knock-on effects on the demand for grain. This is because livestock is reared on grain-feed - indeed, it is estimated that it takes 7 kilograms of grain to produce just 1 kilogram of meat. In a world growing ever hungrier for meat, the need for more grain and better yields becomes clear. One way this can be achieved is via fertilisers - fertiliser stocks such as Mosaic could therefore outperform in the future just as they did during the last episode of food inflation, when many of the themes discussed here first caught investors’ attention.
THEME 2: THE GROWTH OF MIDDLE CLASSES
‘Wealth is spreading’
The global population is not only growing, its composition is also changing in some very important ways. Over the next few decades, the number of people considered to be in the ‘global middle class’ is projected to more than double, from 430 million in 2000 to 1.2 billion in 2030 (or from 7.6% of the world’s population to over 16%) *. Most of the new entrants will come from just two countries - China and India – two places where private consumption has been growing rapidly in recent years. In fact, to put the source and magnitude of this growth in perspective, the World Bank predicts that by 2030, 93% of the global middle class will be from developing countries.
In the opinion of many seasoned investors and analysts, the growth in consumption driven by a rapidly expanding middle class in emerging markets could prove to be the defining investment theme of the next two decades. Indeed, this helps to explain why companies from all over the world are at pains to develop a presence in emerging markets - they are desperate to capture rates of consumption growth that are now unimaginable in mature western economies. Global brands spanning basics like toothpaste to luxury items should all stand to benefit from the middle class mega–trend. More broadly, there will be a large range of areas that could benefit, including retail, autos, financial services and telecom services. As incomes grow, consumption patterns change as the proportion that is spent on basic necessities diminishes, while the proportion of income spent on discretionary consumption rises. For those companies that can successfully target the growing middle classes of the world, the rewards can be transformative – by way of example, despite very challenging conditions in many of its traditional European markets, leading German carmaker, Volkswagen, was still able to report record high profits of EUR11.3bn in 2011, 58% above the previous year and among the highest ever reported by any German company. Much of this profit was attributable to growing sales in emerging markets, with some estimates suggesting that as much as half of the 2011 profit was attributable to its sales in just one country – China.
THEME 3: CHANGING CONSUMPTION HABITS AND BEHAVIOUR
‘Moving to new paradigms’
Not only is the global population growing, but consumption habits the world over are also changing in some very significant ways. Two decades ago, relatively few people knew about the internet, but today it has rapidly grown to become an essential part of work and life in all of the developed world and increasingly so in the developing world too. Being a relatively new development, some of the associated themes have yet to be fully played out and exploited by both businesses and investors. One area of significant change is in the way that people are shopping; an ever-growing proportion of sales activity is taking place over the internet. The speed and convenience of this mode of shopping and the fact that access to the internet is growing strongly makes it a certainty that private sales transactions over the internet will continue to grow.
Companies that can successfully tap into this growth stand to do very well. One example of an outstanding success story is eBay, a company which is peerless in the field of online auctions. Since eBay merely provides a forum for others to trade products, it has relatively little fixed costs to worry about. With a seemingly unassailable position in its field, the increasing global penetration of the internet alone should be a powerful sales driver for the company. eBay’s ownership of PayPal, the internet’s leading payment platform, is particularly significant because it is effectively a leveraged play on something that we can be very sure about: more consumers buying more things over the internet in the future.
Another good example of changing consumer behaviour is provided by food. As explained earlier, rising incomes and the expansion of the middle class in fast–growing emerging economies is causing structural changes in diets as consumers move from generally healthy, low calorie diets that are high in grains and vegetables to higher-calorie, western style diets that tend to contain more meat, dairy and, critically, more sugar. A great example of a stock that derives strength from the related demographics themes of changing consumer habits and increasing wealth in emerging markets is Shenguan Holdings,China’s dominant sausage casing manufacturer.
This change in diets combined with increasing industrialisation and urbanisation has lead to more unhealthy sedentary lifestyles for many people, creating opportunities in the healthcare sector. This exact combination of risk factors is what tends to lead to a number of major health problems such as high blood pressure, heart diseases, cancer and diabetes, a sugar absorption malfunction. Unfortunately, as the chart above shows, diabetes is very much a growing problem throughout the world which means that demand for products aimed at alleviating its symptoms is also growing strongly. This reality very much strengthens the long-term sales outlook for companies such as Denmark’s Novo Nordisk, the world’s pre-eminent diabetes drug manufacturer.
THEME 4: AGEING POPULATIONS
‘The number of older persons has more than tripled since 1950; it will almost triple again by 2050’ *
According to the UN’s Population Division, we are living through a period of population ageing that is ‘without parallel in the history of humanity’. This process is a result of the combined effects of declining fertility and falling mortality rates. Although population ageing is both a pervasive and irreversible reality in nearly all countries of the world, the trend is significantly stronger in more developed countries - the proportion of people aged 60 and over in developed countries is expected to rise to a third of the total in 2050, from around a fifth today.
Population ageing brings with it a host of economic challenges for developed countries. On the most basic level, the reduction in the working age population means a reduced labour supply, which is one of the key determinants of long-term economic growth. However, a more immediate negative effect for national governments is rising age-related expenditure, both in terms of higher public pension costs and increased healthcare and long-term care costs. In turn, rising age-related expenditures are putting upward pressure on government budget deficits and national debt levels.
While the inescapable trend of global population ageing is creating some serious policy headaches for national governments, it can also give rise to some attractive opportunities for both businesses and investors. The most obvious example is healthcare. Although people are living longer than in the past, the functionality of the human body inevitably declines over time, thereby increasing demand for healthcare products (such as drugs, hearing aids, orthopaedics devices and eye care products) and a wide range of healthcare services, including private hospitals.
It is an unfortunate reality of life that population ageing and rising dependency ratios brings with them all kinds of costs; products and services that aim to reduce such costs for either government, employers or individuals themselves could therefore do very well in the future. Generic drug manufacturers that aim to sell drugs significantly cheaper than the established ‘big names’ of the industry represent a good example of this because they benefit not only from an increasing number of elderly people but also from government efforts to control the consequent upward pressure on healthcare costs. Japan-based generic drug producer Sawai Pharmaceutical should be a prime beneficiary of these themes, particularly in light of the domestic economy’s well-known ageing issues.
The growing number of older people is also a secular positive for a number of other industries such as cruise operators and those that specialise in providing various types of care services and assisted living facilities. Thinking more laterally, it is known that the productivity of older groups generally tends to be lower than in younger age groups - it can therefore also be argued that population ageing in the most developed countries may further strengthen the trend towards automation or robotics favouring companies such Japan’s Fanuc, which owns Fanuc Robotics.
Demographic changes will be critical in determining the structure of the global economy of the future. In summary, we believe there are four key areas for investors to consider:
1) The simple growth of the global population means there will be an increase in demand for finite resources, which will be supportive for companies involved in the extraction, transformation and selling of these resources.
2) Thanks largely to emerging markets such as Brazil, Chinaand India, the size of the global middle class is growing rapidly; this bodes well for global consumption demand and those companies that can provide the products and services to meet this demand.
3) Peoples’ consumption habits and behaviour are changing in some very significant ways, spurred in part by technological innovations such as the internet; companies that can provide products and services that are responsive to these changes stand to do well in the future.
4) The number of older people is growing throughout the world but particularly in more developed countries - this constitutes a favourable long-term demand factor for companies that provide products and services that cater for the requirements and preferences of older people, healthcare being the most well known example. Businesses that offer solutions to rising healthcare costs, and which enable patients, employers and states to save money should also do well.
The good news for investors is that these demographic themes are investable now and are anticipated to become more prominent in the future. Many of the long-term positive factors are not yet reflected in the price of the companies that stand to benefit. Academic studies and anecdotal evidence suggests that investors are relatively good at assessing short time horizons, but less good at factoring in the impact of slow-moving changes such as demographics. As these demographic themes continue to shape every aspect of economic life, the awareness of them among investors seems set to grow.
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