Why demographic data is important
Of all the facets of economic life, few are as predictable as the impact of population growth and age structure. But demographics are often ignored, despite the influence they can have over the market's long-term performance.
Most of us know that Britain, and other Western economies, have ageing populations. This is partly the result of the post-war baby boom working through the system, and partly because of lower birth rates.
But predictable though many population trends are, interpreting what this means for the economy at large and the stockmarket in particular is less easy than it might seem. We can predict an ageing population and the burden this places on the remaining workforce. Less easy to forecast is the economic clout wielded by the wrinkly generation.
The pat assumption is that as the population ages, individuals run down their pool of savings and stored-up housing equity in order to pay for care, medical bills and leisure pursuits. More generally, behavioural finance might suggest that the young are less risk averse than the elderly. Since it is arguably the pre-retirement elderly who have most financial clout after a lifetime of saving, we ought to see risk-averse investments being more highly valued at the expense of riskier ones as the population ages.
This ignores the influence of leverage. Younger, less risk-averse investors may be happier to use spread betting and CFDs, which use leverage to produce greater market exposure, than their risk-averse, more conservative elders.
Equally, since institutional investors dominate the market, it is the actions of fund managers at unit trusts, hedge funds and pension schemes that move the market. Pension fund managers in particular act for the benefit of all the pensioners, present and future, they represent, and not just for those in a particular age group.
Assumptions about elderly investors influencing the market also ignore the fact that investing and accumulation of a sizeable portfolio of assets at the time of retirement is the preserve of a small minority of the population. Many individuals over, say, 50 years of age have built up sizeable wealth in the value of their homes, but have saved little in other forms of investment.
Pension fund saving in particular is inadequate for most, especially given sharply reduced annuity rates and amendments to the provisions of pension drawdown schemes that also reduce the income even wealthier pensioners can expect. The average size of a personal pension fund in the UK on retirement is just over £30,000. But the notion of using your home as part of your pension fund, trading down on retirement, doesn't stand up to scrutiny. That's particularly true if the property market is going through a bad patch and homes are difficult to sell.
What it does suggest is that elderly-friendly, lower-priced properties may do well and that there could be glut of 'empty-nest' style family homes for some time to come. Developers have latched on to this trend.
In turn this might suggest that the best way to capitalise on demographic trends is not through its broad impact on the market as a whole, by changing asset allocation accordingly, but rather through channelling investment into individual sectors and companies that might benefit from these demographic trends.
This is not as easy as it sounds. While the moneyed middle class might imagine that cruises, private healthcare and retirement homes would be good investments, the reality is different. The financial circumstances of the majority of an ageing population are likely to be so constrained that pawnshops, budget holidays, discount retailers and providers of simple affordable luxuries are likely to capture most spending.
Care homes and domiciliary care, which might be thought a 'no-brainer' from an investment standpoint, are so heavily regulated and fraught with pitfalls as to make sensible investment decisions extremely difficult. One growth area is likely to be the provision of basic financial advice and legal services to the elderly, dealing with matters such as claiming benefits, enduring power of attorney, wills and conveyancing, but in general this is already catered for by small, trusted local firms. Any discount chain offering similar services may be viewed with suspicion.
There is one obvious growth area. Ghoulish though it may seem, the obvious ultimate beneficiaries of an ageing population are those providing funerals.
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