Monday 19 March 2018

Peak population: why it really is a very big deal for investors

James Saft

PEAK population is coming, sooner than you think, and bringing with it enormous investment challenges.

Birth rates are falling, and will continue to do so, especially in fast-urbanising emerging markets, according to Sanjeev Sanyal, an economist and demographer who is also global strategist at Deutsche Bank.

"We feel that the world's overall fertility rate will fall to replacement rate by 2025. Population will continue to rise for a couple of decades, in large part because of increasing lifespan, but this is a major global turning point, and one with profound investment implications," Mr Sanyal wrote in a note to clients.

That would be about 50 years sooner than recent UN estimates, which expects global population to peak around 2100.

While a falling and ageing population would obviously present opportunities, and from many perspectives is a good thing, it is hard to overstate the challenges for investors in a world in which the number of people is shrinking. A 2010 'Bank for International Settlements' paper by economist Elod Takats estimated that this would, over 40 years, shave about 1pc a year off of asset prices. That's a huge bite out of returns. Think of it this way: investors have almost always been able to expect that should they buy a house or a stock or a bond and hold it for 20 years, they would find a more populous world with more potential buyers.

Ageing populations also have different consumption patterns than growing ones, with potentially higher savings rates and lower consumption, all of which tends to lower growth and returns to asset holders.


A person in their 30s is not only economically productive, they are building up the assets on which they hope to retire, which helps drive asset prices. Compare that to a developed world with more people in their 70s working less and consuming less, moving to smaller houses and selling down their assets. In emerging markets, growth has often depended on cheap labour and high savings rates, things that may ebb or even come to an end. As for emerging markets, wages would rise and savings rates fall.

So why is peak population coming? As countries grow wealthier and as rural populations in emerging markets seek better opportunities in cities, birth rates tend to fall. "Urbanisation is the strongest contraceptive known to man," according to Mr Sanyal. China, which has a one-child population, also has an imbalance between men and woman that will accelerate the decline in population even in the absence of a one-child policy.

That's going to pose problems for China's economic model, which relies heavily on cheap labour and huge investment. While Mr Sanyal argues that China will move from being an exporter of goods to an exporter of capital as it seeks to put to work overseas the huge amounts it has amassed, that is a model that doesn't always work out very well. Just look at the economic history of Britain since about 1850. China's issues will represent opportunities for places like Indonesia, India and Nigeria.

Mr Sanyal also argues, sensibly, that better health and longer lifespans mean you can't simply extrapolate 20th-Century norms into the 21st Century. People will have longer working lives and medical costs probably won't spiral at the rates we've seen. Two surprising potential winners out of all of this are the US and Germany. In part because of immigration, US population will continue to grow until 2100, and its decline in working-age population will come later and be more gentle than in other countries.

Germany too has taken surprisingly aggressive steps to allow immigration of skilled labour, in contrast with Japan.

It is really hard to overstate what a big deal all of this is, with the potential to profoundly affect everything from capital flows to trade patterns to lifestyles.

For investors, really for everyone, peak population isn't just a story that will take 50 years to play out, it may well be the biggest story in many more than 50 years. (Reuters)

Irish Independent

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