An ageing population is one of four megatrends that could play a pivotal role in reshaping the global economy and market over the long term, according to Rob Clarry, investment strategist at Evelyn Partners.
Clarry said that the years ahead are likely to look very different from the past four decades, when global inflation was low and stable. Instead, he claimed the future will be defined by an ageing global population, a changing world order, the energy transition and technological revolution.
Focusing on the first of these, he pointed out the world population reached 8 billion in 2022, with 40% growth in the past 40 years alone.
He said the rising population is due to longer life expectancies, with the number of people aged 65 and over increasing by 623 million in the past two decades. By 2040, this older population is set to reach 1.3 billion. Yet the global fertility rate has halved since the 1950s.
“These demographic trends have proved persistent in the face of a pandemic, the obesity crisis and the ongoing struggle to find cures for killer diseases such as cancer and diabetes,” Clarry said.
Japan offers a glimpse of the fate that could befall the rest of the developed world. In 2050, there will be 80 pensioners in the country for every 100 adults of working age.
Yet this problem is no longer confined to developed economies, with the World Health Organization predicting that two-thirds of the world’s elderly will live in emerging markets by 2050.
“One of the most significant demographic timebombs is in China, where the one-child policy has left an ageing population dependent on fewer and fewer working people,” Clarry added. “This is labelled the 4-2-1 problem, where a single child cares for two parents and four grandparents.”
In many ways, he said ageing populations are to be welcomed: they are a proxy for human progress, reflecting improvements in nutrition, healthcare, sanitation and education. However, they also present significant challenges for governments and economies, particularly as falling birth rates reduce the labour force of tomorrow.
This reduces revenues and spending, and brings about shifts in consumption patterns, which Clarry said have profound implications for investors.
The chart below shows that the old-age dependency ratio (the number of over 65s relative to the number of adults of working age) is set to steadily increase across the world's major economies over the next five years to 2027, and then sharply in the years to 2050.
This will lead to rising healthcare costs. For example, although the average British male can now expect to live to almost 80, data from the United Nations and Office for National Statistics suggest the average healthy life expectancy is only 63 years, meaning he will spend 17 years with some form of health condition.
This puts a strain on government finances, only partially compensated by lower spending on areas such as education, which Clarry said creates “undesirable economic outcomes”.
“People may not be able to work, for example, or may need to fund expensive and ongoing medical care themselves,” he added.
And this problem will be compounded by fewer taxpayers, with a larger retired population meaning there won’t be as many people in work.
This will also hold back GDP growth and productivity, leading to shrinking economies.
“Governments are visibly struggling with the implications of this difficult balance,” Clarry continued.
“Taxes may need to rise on a shrinking working population to pay for the needs of an ageing population. The alternative is for governments to run significant deficits to support public spending. However, both options are politically uncomfortable.”
But ageing populations will bring opportunities as well as risks for investors, with Clarry citing three sectors in particular that are set to benefit.
First, he said the healthcare sector will be buoyed by a long-term tailwind due to an increased focus on medical research to address diseases that have so far proved difficult to treat – Alzheimer’s, for example.
The OECD claimed global healthcare spending is likely to reach 10.2% of GDP by 2030, up from 8.8% in 2018.
“There will be other notable trends in healthcare expenditure,” Clarry continued. “For example, recent analysis from PGIM found that by 2070, inflation-adjusted annual spending on nursing homes will be $325bn greater than it is today. It also estimated that spending on medicine and drugs will climb by more than $40bn annually over the next 50 years due to the ageing of the US population.”
The financial services sector is likely to be another beneficiary, with Clarry pointing out that as people live longer, they are likely to find cash-strapped governments less willing to support them in old age.
“That means they will need to save up to support themselves,” he said, pointing to research from McKinsey & Company indicating that just 11% of investable assets in the US will be held by people younger than 45 by the end of this decade.
“Not only does this create a significant tailwind for various parts of the financial services industry – investment management, platforms or pension providers – it may also influence the performance of financial markets themselves,” he added.
“As large demographic cohorts move towards retirement, it may change the demand for government bonds, or income-generative equities. While any adjustments are likely to be gradual, it can influence the price of assets at the margin.”
Last up is emerging markets with favourable demographics, such as India, Africa and East Asia, the young, fast-growing populations of which will create a tailwind for economic growth.
“Companies that are exposed to these regions – such as consumer goods companies – should have a natural advantage. As such, this can be a fertile area to look for opportunities,” Clarry said, before concluding: “Demographics are not deterministic. However, they will influence broad consumption patterns, the outlook for government spending, and provide support for specific sectors. As investors, we need to recognise the opportunities and risks shifting demographics can create.”