WHY GREYING ECONOMIES OFFER GOLDEN OPPORTUNITIES
In a nutshell:
- In developed markets, the number of people aged 65+ grows three times faster than younger generations.
- Today’s retirees are financially well off, having benefited from attractive investment returns over several decades. We think companies catering to baby boomers and seniors should enjoy sustainable above-market growth.
- We have identified around 500 companies deriving a significant proportion of their revenues from an elderly demographic across a broad range of sectors.
In a world where central banks are diverging, currencies clashing, and volatility sending investors fleeing for safety, it is easy to allow short-term uncertainties to dominate our outlook on the market. While it is right to factor-in the Fed’s next rate move or GDP growth of the last quarter into one’s portfolio positioning, it is equally vital to come up for air, once in a while, and consider the structural shifts that are quietly reshaping the investment landscape that surrounds us – and will ultimately define the means by which economies grow.
While experts and observers have long talked about the ‘demographic time-bomb’ threatening many economies, the true implications of rapidly ageing populations for economic growth remain the subject of speculation. Despite the challenges it poses, we believe there are clear opportunities for investors and corporates with a long-term view and a willingness to rethink old attitudes to ageing in the knowledge that, among the grey, there is gold.
To take stock of the implications of ageing populations on markets over the next five to 15 years, we invited Professor Wang Feng (Professor, University of California, Irvine), and Meret Gaugler (Co-portfolio Manager of Lombard Odier’s Golden Age Strategy) to share their views on how investors might be positioned to reap the benefits of what, for many older people, will prove to be a golden age.
A century of population boom and bust
While the innovations of the twentieth century have allowed us to live longer, healthier lives, at some point in the last two decades, the population explosion that characterised the era staged an about-turn. With several major countries in the world now ageing at a rate that is unprecedented in human history, we are entering an epoch for which we have no certainty of the outcome – or of its effects on economies, markets, communities, consumption habits, etc. However, one relationship upon which demographics expert Professor Wang holds some certainty is the link between an ageing population and slower economic growth.
He outlines his observations: “The global population growth rate fell more than 50% in the second half of the twentieth century, and by UN estimates, the rate is continuing to fall. Against this backdrop, the average lifespan of the global population doubled during the last century. Neither of these trends have ever taken place to this magnitude before. By all accounts, this ageing bias will persist, bringing with it a totally new era for humanity.”
Asia is home to several of the world’s fastest ageing populations, with some economies in the region predicted to lose as much as 15% of their working-age population by 2040, according to the World Bank. In particular, Japan, South Korea, and China show the highest old age-support ratios in the world. With the growth rate of consumers continuing to outpace the growth rate over the long term, the implications for economies, corporates and investors is increasingly significant. Professor Wang explains the challenges that this dynamic poses: “The demographic dividend is a key measure that compares the economic growth potential that can be achieved when the share of the working-age population is larger than the non working-age share of the population. China is an interesting example of how important this relationship can be: Prior to the year 2000, about 15% of its per-capital GDP increase was due to a favourable demographic dividend. But about three years ago, when China’s economy started to slow down, analysts noted that it was also the time when the demographic dividend came to an end. This reversal has occurred in a very short space of time and the end of the demographic dividend is expected to take about half a percentage point off the country’s economic growth each year.”
The sources of slower growth
According to Professor Wang, any economic slowdown associated with a rapidly ageing population is most likely to emanate from three key areas of any economy.
Labour force: One of the first areas to witness the effects of an ageing population is the labour force as fewer people are willing and/or able to work. This decline in the pool of available workers will force companies to do more to maintain the employability of older workers and, to achieve this, they must ensure that their older workers are continuously upskilled. While such effort requires investment, the process will ultimately, in our view, prove positive for both corporates and the people they employ.
Innovation: While there is no hard evidence to link population ageing with reduced innovation in an economy, there is valid concern that the countries most affected by this trend could see a slowdown in entrepreneurialism which would, in turn, weigh on the economy’s ability to adapt, innovate and compete.
Spending and saving: In many parts of the world, public spending remains a significant challenge for governments and, as their populations age, governments will inevitably spend more of their income on pensions, healthcare and other old age-support measures. This shift in government spending will coincide with lower tax revenues as the working population declines.
With governments under increasing fiscal pressure, there is a clear need – and opportunity – for the private sector to step in and play an increasingly meaningful role in each economy’s transition into this new growth profile. While the associated economic malaise will emanate from certain areas of these economies, the nature of any renewed growth will similarly arise from a specific – and highly diverse – range of sectors.
Investing in the golden age of baby boomers
For companies – and those who invest in them – it is vital to understand what each economy’s new growth profile will look like in order to sure that they are appropriately positioned to benefit from it. Meret Gaugler of Lombard Odier Asset Management stressed that amid the challenges outlined above, there are opportunities for investors with a pre-emptive, long-term approach: “In the US, 10,000 baby boomers are retiring every single day. This is a trend that has been taking place for the last five years, to varying degrees, and it is expected to continue for the next 20 years. So the first piece of good news for investors is that this is a long-term phenomenon, a structural change that will benefit those companies that are working to build their share in this marketplace. Companies with exposure to an older demographic are likely to witness sustainable growth in the number of people who consume their products and services. However, as any of us with older parents will know, this is not an easy generation to please! They are highly discerning – and rightly so – and companies will need to work hard to be successful in this rapidly growing marketplace.”
In Europe, the US and Japan, it is the so-called baby boomers and seniors that hold the largest share of personal wealth. Meret expands on this: “In Japan, the baby boomers and seniors currently hold two-thirds of the financial assets. This is quite staggering, and a vital consideration for corporates looking for long-term growth. In Europe and other countries, the statistic is similar. In the US, 70% of disposable income is controlled by the 50+-age group; worldwide, it’s more than half. By and large, the 60+-age group is set to dispose of USD 12 trillion of spending power by 2020. For this reason, we think companies catering to baby boomers and seniors should enjoy sustainable above-market growth over the long term.”
At Lombard Odier, we believe this shift provides investors with attractive opportunities in a diverse range of sectors and geographies, providing an opportunity for investment managers to pick stocks that are likely to grow faster than the market on a sustainable basis. Meret offers some examples: “A person over 60 is, on average, using three times as many prescription drugs as a younger person, taking more food supplements and vitamins, having more lab tests. The older demographic is also an increasingly important discretionary consumer group: women age 50-60 spend three times as much on cosmetics as women aged 20-30. In the US, the average age of a Mercedes S-Class driver was 62 last year.”
Click to enlarge
However, not only is the age balance of the global consumer shifting, among the older demographic itself consumption habits are shifting too. “We are particularly interested in companies that offer innovations that speak to the lifestyle aspirations of older people, such as the arts, leisure and higher education. We also like auction houses, cruise ship companies, companies that offer botox, companies developing labour-saving technologies such as the driverless car.”
Healthcare: A fresh approach to the obvious
While the golden age investment theme is much bigger than healthcare, the obvious connection between wellness and ageing makes the healthcare sector among the direct beneficiaries of this demographic sea-change. That said, health is today arguably among the most challenging investment sectors to find meaningful above-market growth. This is because governments tend to foot the bill for the rising cost of many essential drugs. In the US, in particular, there is growing pressure to bring down the cost of drugs.
Meret outlines Lombard Odier’s approach to tapping into the most-attractive golden-age opportunities that exist in this difficult part of the market: “Within the healthcare sector, we are interested in two things. First, drugs and treatments that are not paid for by the government and, second, truly innovative healthcare solutions. We firmly believe that nowhere is there more need for innovation than in healthcare; and it is this innovation that, in our understanding, will ultimately bring down overall costs. It might be a drug that eliminates the need for three other forms of medication; it might be a procedure that can be done less invasively; it might be a generic drug that is produced at a significantly lower cost to its branded equivalent. Generics are an area that we are keenly interested in as they are one of the most powerful means of containing costs within the system.”
As an increasing number of companies start to target the ageing consumer, there are investment opportunities available in diverse corners of the market – however the older consumer is also a wise consumer, and only companies with a strong offering will be successful in this marketplace. Meret says: “We have identified around 500 companies deriving a significant proportion of their revenues from an elderly demographic across a broad range of sectors. For this theme, we believe the future is golden.
“It is testament to the older generation and to the innovators of the last century that we can all look forward to longer, more vibrant lives. And, as we do so, this investment case will grow only more compelling. As investors, our job is to keep pace with the innovation, ensuring that the portfolios we build are as dynamic, nimble and enduring as the generation themselves.”
IMPORTANT INFORMATION – GENERAL MARKETING
This is a marketing communication issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter "Lombard Odier"). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This marketing communication is provided for information purposes only. It does not constitute an offer or a recommendation to subscribe, to purchase, sell or hold any security or financial instrument. It contains the opinions of Lombard Odier, as at the date of issue. These opinions and the information herein contained do not take into account an individual’s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal recommendation to any investor. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice. Therefore you must verify the above and all other information provided in the marketing communication or otherwise review it with your external tax advisors.
Investment are subject to a variety of risks. Before entering into any transaction, an investor should consult his/her investment advisor and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. The information and analysis contained herein are based on sources considered to be reliable. However, Lombard Odier does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices, market valuations and calculations indicated herein may change without notice.
Past performance is no guarantee of current or future returns, and the investor may receive back less than he invested. The value of any investment in a currency other than the base currency of a portfolio is subject to foreign exchange rate risk. These rates may fluctuate and adversely affect the value of the investment when it is realized and converted back into the investor’s base currency. The liquidity of an investment is subject to supply and demand. Some products may not have a well-established secondary market or in extreme market conditions may be difficult to value, resulting in price volatility and making it difficult to obtain a price to dispose of the asset.
European Union Members: This marketing communication has been approved for issue by Lombard Odier (Europe) S.A., a credit institution authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and by each of its branches operating in the following territories: Belgium: Lombard Odier (Europe) S.A. Luxembourg • Belgium branch, a credit institution regulated in Belgium by the Banque nationale de Belgique (BNB) and the Financial Services and Markets Authority (FSMA); France: Lombard Odier (Europe) S.A.• Succursale en France, a credit institution and regulated in France by the Autorité de contrôle prudentiel et de résolution (ACPR) and by the Autorité des marchés financiers (AMF) in respect of its investment services activities. Netherlands: Lombard Odier (Europe) S.A. • Netherlands Branch, a credit institution regulated in the Netherlands by De Nederlansche Bank (DNB); Spain: Lombard Odier (Europe) S.A. • Sucursal en España, a credit institution regulated in Spain by the Banco de España and the Comisión Nacional del Mercado de Valores (CNMV); and United Kingdom: Lombard Odier (Europe) S.A. • UK Branch, a credit institution regulated in the UK by the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority (‘FCA’) and the Prudential Regulation Authority (‘PRA’). Details of the extent of our authorisation and regulation by the PRA and regulation by the FCA are available from us on request. UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation Scheme does not apply in respect of any investment or services provided by an overseas person.
In addition, this marketing communication has also been approved for issue by the following entities domiciled within the European Union: Gibraltar: this marketing communication has been approved for issue by Lombard Odier & Cie (Gibraltar) Limited, a firm which is regulated and authorised by the Financial Services Commission, Gibraltar (FSC) to conduct banking and investment services business; Spain: Lombard Odier Gestión (España) SGIIC, S.A., an investment management Company authorised and regulated by the CNMV.
Switzerland: This marketing communication has been approved for issue by Bank Lombard Odier & Co Ltd, a bank and securities dealer authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).
United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States or given to any US person.
This marketing communication may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier.
© 2016 Bank Lombard Odier & Co Ltd – all rights reserved