An ageing population is poised to be one of the main investment megatrends of the coming decades. By 2050, 22% of the world’s population will be over 60 years old and the number of people aged 80 or older will triple, according to the World Health Organization.
This demographic shift presents challenges but also offers a range of investment opportunities in companies well-positioned to address those problems.
For Zehrid Osmani, manager of the Martin Currie Global Portfolio Trust, this megatrend offers “substantial” opportunities and drive demand for healthcare innovation and efficiency.
As an ageing population implies a higher incidence of diseases such as cancer, obesity and diabetes, Osmani has invested in companies like Sartorius Stedim, Illumina, Mettler-Toledo, Veeva Systems, ResMed and Coloplast.
He said: “These companies provide innovative solutions in genetic testing, single-use bioprocessing, precision balance instruments, software services for biopharma, cloud-connected respiratory devices and disposable chronic care products, all of which address the needs of an ageing population.”
Martin Frandsen, global equity portfolio manager at Principal Asset Management, agrees and also identified robotics as an area poised to benefit from the ageing population megatrend, as it can be part of the solution.
He also highlighted senior housing, which, despite being a small part of equity markets, offers “strong opportunities” over the long term.
“If you think about the need for senior housing in the next 10 to 20 years, there's definitely not enough supply relative to the demand,” he said.
However, Frandsen stressed that the ageing population megatrend has been disappointing so far in some instances, such as discretionary spending.
As baby boomers own a significant portion of the wealth – 52% in the US, for example – there were expectations they would indulge in more discretionary spending after moving into retirement.
Frandsen said: “There's been excessive expectations that, as these people retire, they would spend down their wealth, which would trickle into a significant uptick in demand for things like senior housing, cruise ships, etc.”
Although discretionary spending has not occurred in the magnitude once forecasted, the ageing population megatrend is still ongoing and likely to extend over the next few decades. This suggests that the increase in discretionary spending could be a slow burn.
Therefore, Tim Lewis, co-manager of JPMorgan European Growth and Income, holds Nestle, which has highlighted the need to serve an ageing population as a key focus for its research and development (R&D) efforts.
“Their new products aim to boost energy levels, restore sleep quality and sharpen focus for older adults,” Lewis said.
Another company he holds to capitalize on the discretionary spending aspect of the ageing population megatrend is EssilorLuxottica, the manufacturer behind Ray-Ban and Oakley spectacles.
Lewis added: “Meeting the demand from age-related vision problems is a key pillar for their growth and they have also announced plans to expand into the hearing solutions market. Later this year they are expected to launch their first product embedding a high-quality hearing technology into fashionable eyeglasses seamlessly.”
Regional specificities
Although ageing populations are a global phenomenon, Asian countries are among the most rapidly greying in the world. For instance, 1 in 10 people in Japan is now aged 80 or older.
Therefore, the Japanese government has implemented policies aimed at accelerating digitalisation in various sectors, such as healthcare, financial services and education.
Nicholas Weindling, co-manager of JPMorgan Japanese Investment Trust, said: “These measures aim to improve the quality of life for older citizens by enhancing access to online services and reducing the need for in-person interactions. This push towards digitalisation has created a fertile ground for entrepreneurial companies that are developing innovative solutions to cater to the ageing population's needs.”
He highlighted that these premises have created a “promising environment” for companies operating in sectors like automation and robotics, in which Japan is a leader, with businesses such as Keyence and SMC.
China is also facing a declining demography, with 28% of the population projected to be over 60 years old by 2040.
This is particularly problematic, as China’s welfare state is limited and considered by some to be inefficient. As a result, Yoojeong Oh, investment manager of abrdn Asian Income trust, invests in AIA, an insurance company listed in Hong Kong.
She said: “About 14% of the company’s new businesses come from mainland China. As people are ageing and living longer in China, they need more healthcare and, therefore, take up more policies.”
However, Oh believes that the best way to leverage the aging population theme in Asia is through technology. Elderlies use a range of electronic devices, such as alarm systems, and stay connected to their relatives via mobile phones or tablets.
She explained: “That's really all powered by semiconductors and memory chips, which come from big technology players such as Samsung Electronics, Taiwan Semiconductor Manufacturing and the entire supply chain made of mid-cap companies that supports the development of technology in Asia.”
Yet, Lewis argues that it is possible to capitalise on the Asian segment of the ageing population megatrend through European healthcare companies such as Novartis.
“Novartis’ cholesterol-lowering treatment Leqvio is seeing strong uptake and seeing real market opportunity in China and Japan where ageing populations are driving higher rates of cardiovascular disease,” he said.
Risks
While the ageing population megatrend is likely to span several decades, it is unlikely to be a tide that lifts all boats.
For instance, Osmani warned against "traditional" pharmaceutical companies due to regulatory and economic challenges such as price controls, increased litigation risks and political scrutiny.
Moreover, these companies have typically struggled with R&D productivity and have, therefore, not been able to replenish their pipelines effectively. This situation increases their risk of patent expirations and generic competition.
Osmani said: “All these risks and challenges make the traditional pharmaceutical companies less appealing as long-term investment opportunities in our view.
“Instead, investors could prioritise firms in medical technology and healthcare delivery, which are better positioned to innovate and meet the growing demands of an ageing population, and which are better positioned to benefit from the significant spending required in healthcare infrastructure, and in drug development and outsourcing trends in particular.”
While presenting opportunities, Rob Perrone, investment counsellor at Orbis Investments, rather sees ageing population as a risk factor.
He explained: “We had growth in the labour force for 40 or 50 years and the impact of that was disinflationary. That's now going the other way. We have fewer working-age people for every pensioner, so the dependency ratio is getting worse. If the labour market becomes tighter, unemployment rate gets lower and workers have a bit more bargaining power with employers, which could lead to higher wage growth. Wage growth has a very tight relationship with core inflation.”
Yet, he warned that the market does not seem very concerned about this dynamic and is assuming that inflation will be “well-behaved”, falling back to 2% - the level central banks target - and staying permanently at this level. As a result, this risk is not reflected in asset prices.
Another risk associated with the ageing population is that the costs of pensions and healthcare programmes will likely balloon.
Perronne said: “Already this year in the US, if you combine mandatory spending and Medicare plus net interest on the debt, that already covers 100% of government revenues. They are already looking at a deficit before they even consider defence or discretionary spending.
“The latest estimates of US government are that the Social Security Trust Fund, which helps to fund pensioner payments will be depleted in 2033 or 2034.”
He added that governments are unlikely to reduce these benefits or raise taxes to fund them, as such measures would be very unpopular with voters.
Instead, he believes governments will “kick the can down the road” and issue more debt, as this is the more appealing option from a politician’s perspective.
“When we look at where debt is headed in the US, the UK, Japan, etc, the debt-to-GDP ratio is going to go up. As governments have bigger debt loads, it will become harder and harder to limit their deficits, because the interest on the debt is consuming more. More debt means more interest expense, which means worse deficit, which means more debt issuance to cover those worsening deficits.”
Therefore, Orbis favours inflation-linked bonds versus long-term nominal bonds and shorter terms bonds versus long-term bonds.