Charles Fotheringham: Baby bust nations will face hard times as populations age

Published on Saturday 11 July 2009 15:02

POPULATION growth is beneficial for any economy, but for investors it is better if the median age of that population is low, ie a young economy.

Many investors simply believe what they hear and follow the herd, but research may lead them to pastures new. The current view is that over the next decade population growth will be highest in India followed by the emerging markets, then the United States, Brazil and China. The lowest population growth will be in Russia, Japan and western Europe.

The actual 2009 population growth estimates from the US Global Health website (sponsored by the Kaiser Family Foundation) are very interesting. The highest population percentage growth forecast for 2009 is currently United Arab Emirates with a 3.96 per cent increase, then Nigeria with a 3.68 per cent increase, followed by Kuwait, Yemen and several other smaller nations such as Ethiopia.

India, believe it or not, is number 67 on the table with a growth forecast of 1.55 per cent, followed by Brazil at number 86 with a 1.2 per cent increase. The United Kingdom is ranked 126 with a 0.28 per cent forecasted increase for 2009. The United States of America is number 96 (0.98 per cent growth) and Japan is ranked 154 (-0.19 per cent growth).

Population growth is fine but the key question is whether an economy is suffering from signs of an ageing population. For long-term investors an ageing economy is one that is going to have financial problems. These maturing economies not only suffer due to their limited ability to create wealth but from the increasing strain to provide pension provision, healthcare and infrastructure.

The oldest economies (age-wise) are as expected, except for the often overlooked retirement municipality of Monaco at the top of the list with a median age of 45.7, but thereafter it is the usual suspects: Japan with a median age of 44.2; Germany (43.9) and Italy (43.3). The United Kingdom is 16th with a median age of 40.2, and the United States with a median age of 36.7.

It is the young emerging economies where wealth creation should be evident over the next decade, especially as many emerging countries have median ages of 30 down to 16 years of age. The very poor economies which suffer from low life expectancy usually do not have regulated investment markets so are not generally candidates for normal private investors.

As change is always afoot, the median age tables are a useful read, for over the next few decades many established markets are going to suffer from demographic change. Apart from living longer, the second and bigger cause of the ageing problem is the fact that people everywhere are having far fewer children so the younger age groups are much too small to counter-balance the growing number of older inhabitants.

For example, although China is attracting a lot of new money it is a country alone among developing emerging economies that is already beginning to age, and surprisingly rapidly at that. This is because over the past 30 years, there has been a tight lid on population growth. The Chinese population is due to peak at about 1.46 billion people in 2030 and then decline gently. Although China has seen astonishing economic growth in recent years, it is still not regarded as a rich economy so it will eventually have trouble absorbing the cost of an ageing population. This is not often talked about but it will become a major issue in due course.

China for the time being is a relatively young country with a median age of around 34, but by 2050 its median age will have risen to about 45. The ageing pattern is very similar to what is happening in Japan, Hong Kong, Singapore and South Korea but the difference is that in China it is happening at a time when the country is still relatively poor.

In general, over the next few decades the labour forces in rich economies are set to shrink to such a low point that immigrant workers will be required to compensate for the diminishing labour pool.

There is no guarantee that effective policies can be put in place to rectify the situation, as Ronald Lee, the director of the Centre on the Economics and Demography of Ageing at the University of California, puts it succinctly: "We don't really know what population ageing will be like, because nobody has done it yet."

The conclusion is that global population growth should remain beneficial for commodities, natural resources, infrastructure and consumer goods (let's say the investment markets in general), but the global ageing phenomena in 20 to 30 years' time will bear significantly on the long-term outlook for inflation. This is quite worrying.

&#149 Charles Fotheringham is the senior investment manager at Gillespie Macandrew specialising in thematic and trend investment strategies