In the second of our three-part series, The Winds of Demographic Change, we examine the global investment implications of declining fertility rates, aging population and increasing life expectancy.

The Winds of Demographic Change: A Global Perspective

In 1950, the top three overseas economic powers of the last 50 years—Japan, Germany and the United Kingdom—had populations that ranked them the fifth, seventh and ninth most populous nations in the world. By the year 2050, it is estimated that they will rank 20^th, 21^st and 22^nd, respectively.¹

China faces its own demographic implosion. Thanks to 35 years of its one-child policy, China’s working age population will shrink by 100 million workers by 2035, while its 65-plus population grows by 4 percent a year, setting the stage for severe financial stress as fewer workers support a growing pool of elderly.

Implications of Changing Demographics

Evidence suggests that an aging or shrinking population will lead to economic decline. There are several reasons for this: a lack of young labor can drive wages up as employers compete for workers, a shrinking ratio of workers-to-retirees strains public finances and lower consumer spending reduces economic activity.

Few countries are expected to experience the high birth rates that created the “demographic dividend” that catapulted China and South Korea to economic success. Of the countries with high fertility rates—India, Pakistan, Egypt, Nigeria and Kenya—none are presently well positioned to take advantage of their demographic dividend.

Reimagining the Investment Selection Process

As investors survey the future landscape for international investment opportunities, population patterns may become an increasingly important metric. But, given the prospect that most major developed countries are shrinking and aging, evaluating investment opportunities may have to consider what countries or companies are doing to:

• Raise productivity (an antidote to a shrinking labor pool)
• Instituting welcoming, well-designed immigration policies to combat worker losses and lower consumption
• Promote greater gender equality
• Encourage its people to work longer
• Support innovation that extends the health and working life of aging individuals (for instance, Japan is currently developing robotic and exoskeleton technology to allow individuals to perform work past retirement age)
• Develop sustainable designs for living in crowding urban areas
• Position themselves to profit from the high population growth rate in Sub-Saharan Africa
• Implement public policy that addresses worker displacement arising from a transition to robotics and AI
• Respond to specific demographic opportunities, e.g., health care tourism (Mexico)

The countries that may be central to a present day international allocation may not continue to be in the future, requiring advisors to redefine their approach for the changes that lie ahead.

In our final installment, we’ll shift the focus from the investment implications of global demographic changes to their possible geopolitical and social implications. If you missed the 1st in a Demographic Series click here.

Sources:

1. http://www.weeklystandard.com/demography-is-destiny/article/636998
2. https://www.forbes.com/sites/oracle/2015/11/03/why-demographic-trends-spell-trouble-for-china-and-russia-and-prosperity-for-us/#d85d658cfccb

See referenced disclosure (2) at https://blog-dev.americanportfolios.com/disclosures/