Investing for peak population
(James Saft is a Reuters columnist. The opinions expressed are his own.)
By James Saft
(Reuters) – Peak population is coming, sooner than you think, and bringing with it enormous investment challenges.
Birthrates are falling, and will continue to do so, especially in fast-urbanizing 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,” Sanyal wrote in a note to clients released on Monday.
That would be about 50 years sooner than recent UN estimates, which expect peak population in about 2100.
While a falling and aging 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 actually shrinking. A 2010 Bank for International Settlements paper by economist Elod Takats estimated that demographics would, over 40 years, shave about 1 percent 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. Aging populations also have different consumption patterns than growing ones, with potentially higher savings rates and lower consumption, all of which tends to lower economic 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 labor and high savings rates, things which 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, as we’ve seen in such disparate places as Mexico, Brazil and China.
“Urbanization is the strongest contraceptive known to man,” according to Sanyal.
HOW TO PLAY IT
China, which has also had a one-child policy, is already seeing a decline in its working age population, according to Sanyal, which may nearly halve by the end of the century. China also has an imbalance between men and woman which will accelerate the decline in population even in the absence of a one-child policy.
That’s going to pose huge problems for China’s economic model, which relies heavily on cheap labor and huge investment. While 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 which 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, which may, if they follow the right policies, be able to take advantage of their later population peaks.
Sanyal also argues, sensibly, that better health and longer lifespans means that 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. That will help to blunt the impact on asset prices, as retirees sell assets rather than accumulate them. It also implies that the savings rates needed to fund a 90-year life in a shrinking population world may be a bit lower than feared.
Two surprising potential winners out of all of this are the U.S. and Germany. In part because of immigration, U.S. population will actually continue to grow until 2100, and its decline in working-age population will come later and be more gentle than in many other countries. Germany too has taken surprisingly aggressive steps to allow immigration of skilled labor, in marked 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.
(At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on)