Monday, May 25, 2015

demographics

This week I’m shifting gears to address a topic I think is highly relevant, receives little “ink” but could have major investment implications: demographics.

At Zacks Investment Management, one of the core tenets of our investment decision-making process is the identification of macroeconomic themes that drive stock selection. As we analyze the macro environment, we are constantly asking ourselves: what are the big trends we think will shape the global economy not over the next quarter or two, but over the next several years? And, how can that inform our investment decision-making today and “tomorrow” on a micro level?

In my view, shifting demographics is one of these big, secular trends — and, I think the seismic shift in age distribution will affect spending and technology patterns, as well as create winners and losers along the way.

Demographics are Shifting Rapidly

A look at the data shows us that, in the next 30+ years, we’ll see the shape of the global population’s age distribution change dramatically. The baby boomer generation, or those born between 1945 and 1964, is starting to move into retirement – and fast. About 10,000 new baby boomers retire every day, and Pew Research estimates that 10,000 will cross that threshold every day for the next 19 years. A demographic shift this large has never occurred before and, by 2050, some 20% of U.S. population will be over the age of 65 (up from about 14% today).

Additionally, this shift is not just occurring in the U.S. — Germany, France, the UK, Russia, China, and Japan are all slated to see similar shifts. Over 40% of Japan’s population will be over the age of 65 by 2050, and China’s over-65 population is expected to grow from 9% today to over 25% by 2050. The world is aging.

Using this knowledge, we can ask deeper questions about the economic and investment implications. Questions like: where are these people likely to spend more? What industries and sectors are going to be impacted as a result? Are rapidly aging countries likely to feel a sizable impact to GDP?

A Look at Spending Patterns

Studies show that consumer spending peaks around age 45 and that every sector sees reduction in spending as people age — except for healthcare. Looking at both ends of the spending spectrum, we can reasonably conclude that healthcare companies specializing in medical devices, pharmaceuticals, and insurance could benefit from an aging population that spends more. This could be a formidable reason to think about overweighting healthcare and medical companies in a portfolio.

On the other end, we also know that older individuals spend much less on apparel, services, housing and education over time. As we look at companies in those sub-sectors, we consider the long-term challenge they face when it comes to targeting demand: they either recalibrate their offerings to cater to the older crowd, or they look for underserved but fast-growth markets outside the U.S. As asset managers, we want to identify companies that will do both, and avoid the ones who fail to respond to shifting trends.

Other sectors that could come into focus are asset managers, insurance companies, travel and technology companies that address the needs of boomers. From wearable devices that help people track health needs, to a company like Harley Davidson, which cites that its largest customer base comes from the aged 50 – 65 crowd. Companies that can properly position themselves for an ongoing windfall of new customers would be viable long-term plays.

The Bottom Line for Investors

This isn’t to say that shifting demographics should be the single driving force behind portfolio construction and decision-making, but there is a material case for understanding how the companies you buy are strategically levered to serve (and sell to) such a large growing population segment. Finding companies whose growth rates will move alongside the shift could be a key part of a long-term winning strategy.

-- Mitch Zacks, Market Insights, Zacks Investment Management

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