Your investments when the world population gets older
As we wrote in a previous post, the world’s population is in the midst of a profound transformation, with a notable increase in the number of elderly individuals. This shift is expected to wield a significant influence on the global market, ushering in both challenges and opportunities.
As we gear up for this demographic shift, it’s essential to grasp the dynamics of an aging economy and the investment prospects it presents.
So, how rapid is this aging phenomenon? In 2015, approximately 12% of the global population was aged 60 and above. Fast forward to 2050, and this figure is projected to nearly double, reaching 22%. The statistics are even more striking in some regions, with over a quarter of the population set to be 60 or older, apart from Africa. Europe anticipates a staggering 34% of its population to be in this age bracket, while in Japan, the figure is expected to soar to almost 50%.
If that wasn’t enough, the over-80 group is going to triple in size globally, with the global life expectancy predicted to rise to 77 by 2050, compared to 71 in 2015. Notably, this phenomenon isn’t limited to developed markets; countries such as China, Thailand, and Argentina are already witnessing a significant demographic shift towards an older population, which is projected to further increase.
This significant demographic change is bound to have a profound impact on the economy, leading to a smaller workforce, surging healthcare expenditures, and changes in consumer behavior, just to name a few. While this may pose challenges for countries with less adaptable populations, it also presents potential opportunities within sectors popular among the elderly.
How the elderly spend
Understanding the spending patterns of the aging population is essential. Older individuals tend to have more disposable income, as wealth accumulates and towards the end of a career one tends to have a higher salary. Expenditure habits span diverse categories, from healthcare and self-care products to travel and tourism: older people tend to spend money treating themselves. Notably, the demand for cruises is soaring, with a considerable rise in passenger numbers, signaling potential growth for cruise operators like Carnival and Royal Caribbean. And European women over the age of 60 spend twice as much on beauty products as those under 25 do.
However, certain trends indicate a shift in spending habits as well. For instance, data suggests a decline in purchases of automobiles among individuals over 75, potentially signaling a shift in preferences toward autonomous vehicles (Tesla could become a status symbol for the elderly). However, there are varying predictions regarding expenditure in recreational services and dining, with some experts anticipating a decline while others foreseeing the exact opposite.
The healthcare industry
Old people tend to get sicker: in the US, spending on healthcare doubles for those over 65 – and then doubles again above 85.. Investing in sectors such as healthcare, pharmaceuticals, and biotechnology appears promising, given the anticipated surge in demand. Stocks, exchange-traded funds (ETFs), and real estate investment trusts (REITs) focusing on healthcare and retirement housing are viable investment options to consider.
Emerging markets have the twin benefits of a population that’s getting older and richer. It’s predicted that the emerging-market healthcare sector will grow 6% a year for the next decade – twice as fast as in developed markets.
Diseases which target the elderly like cancer, dementia, and Parkinson’s are set to become even more prevalent. Biotech companies that can cure these ailments could be in for a windfall – but it’s tough to predict which will be the ones to succeed. A safer bet is to invest in a pre-made basket of stocks: you can buy funds that track major healthcare indices like the MSCI Health Care Index, or ones that track specific countries, like the Solactive Emerging Markets Healthcare Index. For something a bit more specialized, the iShares Nasdaq Biotechnology ETF gets you into over 100 biotech stocks.
The financial industry
The implications of this demographic shift extend to the financial landscape, influencing pension schemes, savings, and investment patterns. Since people are expected to live for longer, they will likely become more concerned with whether their savings can support them. That will probably mean increased demand for financial advice (particularly robo-advisors) and life insurance products, as well as an increase in appetite for more reliable, risk-averse investments. DBS Bank thinks an aging population will mean more demand for bonds and dividend-paying stocks – meaning the wider stock market might not grow as much as it has been. But not everyone agrees: asset manager Pictet says that because longer retirement periods require bigger saving pots, investors will increasingly turn to riskier investments with higher growth prospects.
The economics of an older world
There are two clear factors at play. One is more government spending on healthcare and pensions, potentially reducing public investment in other areas like infrastructure. The other is an increasing proportion of the population being older – in part because as societies become wealthier, people have fewer children.
This reduces the proportionate size of the labor force and could lead to decreased productivity because younger people will have to spend more time looking after the elderly. As these two factors are the two drivers of economic growth, the implications are pretty grim: an aging population means less economic growth.
Investing for this new normal will involve seeking products that offer yield even without much economic growth. Investment firm KKR thinks infrastructure and asset-based lending investments could be particularly helpful.
While this demographic trend seems irreversible, there may be some solutions to mitigate the consequences. One is education: if people retrain in later life, they can work for longer and retire later. Another is technology: when it becomes hard to hire people for jobs, robots will step in. That’s good news for people working in those areas, and for the tech companies working on advanced AI software.
In any case, if an aging population means lower overall growth, one way to protect your finances is to try and benefit from the changes before they happen. Whether it’s by investing in one of the sectors likely to benefit from this trend, or picking a broad aging-focused fund like the iShares Ageing Population ETF.