Covid-19 has seen investors poring over death statistics as much as earnings figures. Such behaviour is unusual: demography typically features little in investment strategies. But those with long horizons should pay attention to vital statistics beyond their use during a pandemic.
Investing is, after all, a form of forecasting. Where investors place money depends on how they expect economies to fare in future and the size, growth and make-up of populations will shape those prospects. The economic outlook for Nigeria and Hungary could hardly be more different: the one large, fast-growing and youthful; the other small, contracting and older.
Demographic shifts are slow—but relentless. A baby boom will be followed two decades later by a rapidly growing labour force, and then before long by strong consumer demand as more households are formed. That’s what happened as the post-war baby boomers grew up in the US and other western countries, providing an enduring impetus to GDP growth, boosted further by more women working. As that generation retires the trend is reversing, dragging on growth.
The point about that long march of the baby boomers is that it was predictable. There can be surprises, such as the deaths from the current pandemic. But demographic trends are typically persistent, such as the long-term tendency for life expectancy to rise and fertility to fall. Migration is more variable but is subject to controls that limit its impact. Awareness of all this allows us to sketch a map of the shape of various future economies, and form judgments about which look like attractive sites of investment. Based on population alone, the relative decline of the advanced economies will continue and the Chinese economic miracle will run out of steam. The regions with potential to forge ahead are South Asia, dominated by India’s huge population (set to exceed China’s by 2027), and Africa, whose share of global population will rise from 17 per cent today to 26 per cent in 2050.
That map needs to be filled in further. In principle, faster innovation among advanced economies could offset the drag from demography. But an ageing workforce tends to inhibit productivity growth. Though China is now also facing a demographic headwind, it still has scope to grow by closing its productivity gap with the rich world.
Before too long, countries in Africa will start to follow those in South Asia in entering a prolonged period especially favourable for growth, as their working-age populations bulge with relatively few old and young dependants, the latter because of falling birth rates. But that demographic dividend will pay out only if countries pursue the right economic policies, and provide effective health and education systems.
Demography provides a framework for where to invest, whether in industries like pharmaceuticals that are relevant for ageing populations, or towards countries such as India that are in a demographic sweet spot. While investing in emerging and frontier economies is not for the fainthearted, you can still get in on the action by acquiring shares in developed-world multinationals that are active in the new growth regions. It surely has to make sense to tailor portfolios to the long-run demographic forces transforming the global economy.
