The baby-boomer effect is well known, but far too often is misunderstood. We have an unprecedented rise in the over 65 age group worldwide and the working population is growing at a far more modest rate.
Many analysts are claiming this baby boomer effect will mark the end of a golden era in asset prices and an extended period of stagnation like that seen in Japan since their meltdown in 1991. This article intends to detail some the real problems we face and how the Gen X’s and Y’s can save the day and even profit from it.
Ballooning retirees
The fact is that world’s overall population is currently 7.34 billion according to the World Bank. It also means the global population is growing at 83.44 million people per year, which comprises approximately 13.9 million growth in the 0-15 year old bracket, a 50.9 million growth in the 15-64 year old’s and a 18.6 million growth in the over 65’s.
Just to clarify – this does not mean that we are magically giving birth to a 76 year old… Rather, we are seeing a significant shift in our “demographic curve”. More specifically, the over 65 segment is growing at an unprecedented rate never seen before in history.
The optimistic few tend to theorise that retirees, typically in the over 65 demographic, will tend to increase spending on healthcare services and household necessities whilst reducing spending on other areas, creating a drag on the economy but a positive for age-related investments. The theory continues, with healthcare services expected to increase as their profits rise at a faster rate than other sectors and in this anticipation, we see a premium in the price people are willing to pay for healthcare stocks.
As an investment theme for the next 20 years, this is all too often overplayed and misconceived. The next time someone remarks that the demographic trends are a basis for long-term conservatism, it is worthwhile considering the following as a counter-argument.
More specifically, many intelligent people are pointing to this spike in the over 65’s as an area of contention, as the growth rate in this segment have not historically correlated in any significant way to the economy.
The even smarter ones are looking at the people rising behind the baby boomers – the prime-age working population – as a key driver of the economy – which as can be seen below does have a much stronger correlation.
Therefore, the real threat of an economic drag would seem to come from lacklustre growth in the working population – regardless of the rise in the over 65’s.
Why it’s not (totally) the baby boomers fault
If there is one lesson to this analysis, it’s that asset prices tend to do well if the prime working population is still growing – as it is today – regardless of the over 65 demographic.
Analytically speaking, the evidence grows stronger the more we specify the working age demographic. For example, the growth of the 25-64 year old demographic in Australia has a stronger correlation than the broader 15-64 bracket set by the World Bank (to be expected as most 15-24 year old’s are still studying). The 45-64 year old bracket is stronger still, which makes logical sense given they are the key contributors to the economy.
In the Australian example detailed, the grey shaded boxes below mark periods of rapid market decline, which typically coincide with a fall in the working population.
In fact, in every single period noted in the table, the share-market fell sharply at some point during the time in which the working population suffered a setback – regardless of the gradual increase in the over 65 age bracket.
Said another way, playing the over 65 bracket as a proxy for the economy would have been a bad mistake – and may continue to stay that way.
At first glance, the naysayers might say the data was coincidental or even causal – and they may be right to a certain extent. For example, World War 2 was not caused by a change in the Australian working population; it was clearly the other way around.
One should not be so complacent to say that the prosperity of the economy or share-market hinges precisely on the number of 25-64 year old’s nor the 45-64 year old’s. Clearly it is a small fish in a very large pond of considerations. Yet in a world where it is getting increasingly harder to outwit your competition, keeping an eye on this type of data can uncover something that the experts overlook.
How to invest in the face of this major change
As an investor, one’s job is to find high quality assets and preferably pay a low price for it. A willingness to pay a premium for healthcare is a classic example of the “baby boomer effect” and its popularity as an investment theme. The allure is understandable given the defensive nature of their income streams and a strong profit growth record, but investors need to comprehend the fact that the majority of the upside is likely priced in.
A potentially better way to assess the demographic changes underfoot is to play the prime working-age demographic as a greater proxy for market opportunity and/or volatility. Using this proxy, if the working population (especially the 45-64 range) is growing, there is reason to be optimistic. Conversely, if the working population is declining, opt for conservatism and cautiousness. Unfortunately, the world is still in a cycle of low growth in the working population with no obvious signs of a turnaround.
(Side note: This is one of the nine pillars to the “Science of Investing Scoring System” in the Investing Times Asset Allocation Research Report).
Of course, identifying a structural change is only half the battle and it requires another level of skill to profit from it.
Therefore, recognise that a shifting demographic curve can create conservatism and misconceptions which ironically creates opportunity. It is a simple way of saying that as we age we tend to become more risk averse, meaning that bonds and other defensive investments (that offer supposedly conservative returns) will increase in popularity as our population ages creating an initial yet temporary boost (which we may have already seen). The irony is that the working population are the ones left to clean up the mess, and this segment has a greater ability to influence economic growth than most of us realise – with a historical record to back it up.
While the above analysis does not cover the full spectrum of considerations, it should hopefully enlighten some readers and provide a basis for optimism in a pessimistic world. As always, doing your homework and turning over rocks can quite literally pay dividends.
