Keeping an Eye on

The Future

An ageing global population provides interesting investment opportunities but reinforces the 'new normal' of lower expected returns for investors.

One of our core investment principles – patience – seems to have gone out of fashion in today’s digital world with its insatiable appetite for more and faster information. Investors seem to be neglecting longer-term trends that can influence the economic outlook and investment performance. We believe changing demographics are one such long-term driver – as an ageing population, particularly in developed economies, reinforces the ‘new normal’ of lower expected returns.

Longer lifespans + declining birth rates = ageing populations

By the year 2030 the world’s population is expected to rise by 16% to about 8.5 billion people, and to 9.7 billion in 2050. The growing population is also expected to get older as life expectancy continues to rise and birth rates drop over the period. This will be a feature not only of developed economies but of some emerging economies too – and the pace is expected to be much quicker in the latter.

For example, while it took 150 years for the percentage of France’s population older than 60 to grow from 10% to 20%, countries like Brazil and China are likely to manage this in about 25 years (see chart below). 

How long does it take for the over-60 population to  double

This combination of rising life expectancy and falling birth rates raises the dependency ratio – the number of people aged 65 and older divided by the population aged 15 to 64. For the world as a whole, the United Nations forecasts that this ratio will triple over the next 84 years, driven by rapid ageing in less-developed countries. For example, the UN projects that China’s dependency ratio will increase fivefold between 2015 and the end of the century. In more-developed countries like Europe, Japan and the US, the ratio will double over this period.

That’s not to say we won’t see some regional differences in areas such as the Middle East and Africa, particularly in the short term, where a rapid expansion in the younger population is expected.  

Falling birth rates lead to slower growth of the working-age population, which is a headwind for economic growth – usually described as a function of labour, capital and productivity. To make matters worse, productivity growth worldwide has plunged in the last 10 years or so, hence it’s unlikely that productivity can offset the negative demographic trends.


Baby boomers and asset prices

In many developed countries like the US, population growth surged in the two decades after the Second World War, as couples who could not afford families earlier made up for lost time. These ‘baby boomers’ are now beginning to retire, which could influence asset prices. As investors retire, they sell assets to finance their retirement; if enough people are retiring at the same time, like the baby boomer generation, it’s been suggested we could get an asset-price ‘meltdown’ as would-be sellers outweigh potential buyers.

But this theory is exaggerated. The main factors limiting the meltdown effect are increased longevity, leading retirees to hold onto their investments for longer, the need in an ageing society for more capital to replace labour, and demand from international investors.

Moreover, equity assets are concentrated in the richest part of the population, who are unlikely to sell them all. But investors in the developed markets should expect some headwinds to asset values and returns over the next fifteen years, as a large segment of the population enters retirement.

One study found that a 1% rise in the share of 50-54 olds in the population raises equity returns by about 1% per year, while a 1% rise in the share of the 70+ age group cuts equity returns by about 2% per year. The results for bonds are similar but less pronounced, partly because many investors switch from equities to bonds as they age.


Demographics and investing

In an ageing world, poor countries with favourable demographic profiles like India and Nigeria could be big winners. High-quality multinational companies with good access to the growing markets should perform well. Companies in sectors that cater directly to an ageing society such as healthcare (see the next article in our Investment Outlook 2017 series: ‘Healthy long term returns’) and tourism should also benefit from these secular trends.

Baby boomers in the developed markets have only just begun retiring and this trend is likely to continue for at least another 20 years. During the early stages of retirement asset sales tend to be modest so it’s too early to observe a ‘retirement impact’ on asset values just yet.  In due course, though, we can expect retiring baby boomers to act as headwinds for asset prices.


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