While we in the investment industry like to analyze market data and trends, returns over the past five years have been heavily influenced by macro events and policy errors. Some believe that macro events will shape markets and economies over the long term. Therefore, it’s worth identifying these themes so that investors can construct portfolios to take advantage of, or avoid, a particular theme.
There are a number of themes with the potential to impact asset owners. These include the following:
- deleveraging and financial repression;
- aging workforces and dependencies;
- pollution, resource scarcity and climate change;
- effects on energy, products and services;
- society’s changing views on the environment; and
- new framing of financial regulation.
I am particularly interested in the aging theme, since it has the potential to impact workforce participation, available skill, economic output, capital markets and our quality of life. It’s well known that key developed nations will face rising dependency ratios (the ratio of non-working-age population to working-age population). Rising dependency ratios are often associated with aging societies as the retired population tends to rise. It’s also worth noting that dependency ratios can increase as the result of a baby boom, though, globally, we haven’t experienced this in the developed world for some time.
What’s less well known is the fact that China will be facing the same issue in the not too distant future, in part, due to its one-child policy. The chart below shows how various countries will be aging over time.
| Expected population growth (%): 2012 to 2022 | 2040 | |||
| Total | 15-64 year olds | 15-39 year olds | 40-64 | % population aged 60+ |
Japan | -0.2 | -0.9 | -1.7 | -0.2 | 43.3 |
Germany | -0.2 | -0.6 | -0.8 | -0.5 | 39.0 |
Italy | 0.0 | -0.3 | -1.3 | 0.5 | 39.9 |
Korea | 0.3 | -0.3 | -1.5 | 0.8 | 38.6 |
China | 0.3 | 0.0 | -0.6 | 0.7 | 27.9 |
France | 0.5 | 0.0 | 0.1 | -0.2 | 31.6 |
Spain | 0.5 | 0.2 | -1.7 | 1.7 | 37.9 |
United Kingdom | 0.6 | 0.2 | 0.3 | 0.2 | 27.9 |
United States | 0.8 | 0.3 | 0.5 | 0.1 | 25.4 |
India | 1.2 | 1.5 | 0.9 | 2.4 | 15.6 |
Sources: United Nations, Towers Watson and The Global Aging Preparedness Index, Center for Strategic & International Studies
Canada’s population greater than age 60 is expected to increase to 31.5% in 2040 from 18.6% in 2007 unless birthrates and/or immigration increases.
There are a number of implications associated with slowing, maturing developing economies. These include but are not limited to the following:
- an increasing shift toward services and away from goods, suggesting lower incomes;
- declining rates of investment and savings, coupled with rising public sector deficits and negative current account balances, all of which are negative for GDP; and
- an increasing strain on governments to fund pay-as-you go social welfare systems that were initiated when dependency ratios were much higher.
While these impacts are very important, I’m particularly interested in the potential investment implications of such demographic changes.
Many mature economies have moved into a de-accumulation phase (or negative saving) due to the large number of retirees. De-accumulating societies tend to be more focused on income-producing assets such as fixed income, dividend-paying securities and real estate assets. This will likely translate into less support for many developed nations’ stock markets as the maturing population seeks fewer growth assets in their move to stable and predictable cash flow. We’ve definitely seen evidence of this over the past five years.
Slowing GDP could also act as a potential drag on corporate profits within these countries to the extent that they rely on the domestic economy. Within the developed economies, the higher immigration countries such as the United Kingdom, Canada, Australia and the United States should fare better, as their aging process will be more protracted.
Within income-generating assets, there will be winners and losers. Fixed income securities will remain relatively expensive given the demand for secure income-producing assets. However, real estate focused on the largely retiring population—condominiums, assisted living, retirement homes—will be in demand. We have seen this increased interest and investment both in real estate and infrastructure investment and products in the past few years.
Accumulating societies will be more supportive of most public and private investment across a range of asset categories: debt, equity, real estate, infrastructure and private equity. Growth markets should continue to experience higher GDP, a growing middle class and populations that are in the accumulation phases of their lives. As such, investment in public debt and equity will be supported for many years. Many of these developing economies require infrastructure development: from roads, airports and water treatment plants, to housing, electricity and communication infrastructure. Much of this will require financing from sources other than government.
Given the mixed nature of these developing economies, the challenge will be to determine in which countries to invest, since not all will have legal, regulatory and investment cultures that recognize investors’ rights. As well, western moral norms may be tested as approaches to business operation and deal making reflect the moral norms of a particular country.
Another challenge will be to determine how best to access these markets. Which markets are better for debt investors, which for equity? Should an investor do so through public markets or private investment? Can these developing markets be accessed through western public companies that derive a large portion of their revenue from developing economies?
As you can see, themes and trends have the ability to shape capital markets for years to come. Investors should spend time analyzing non-financial impacts in order to better position their portfolios for success.