We recently met with Dick Hokenson from ISI International Strategy & Investment Global Demographics. Hokenson laid out several key issues to consider when developing investment strategies, including:
- More than 50% of the world is now urbanized (70% by 2050).
- More than 50% of the world’s population lives within 200 kilometers of a coastline.
- Of all children born in the developed world today, at least half will celebrate their 100th birthday.
- Nearly half of the world lives in countries with birth rates that are below replacement. Hence the increased focus on immigration.
- Baby boomers are retiring and their parents are still alive! For the first time ever, there are multiple generations of retired households.
Separately, the International Labor Organization (ILO) data on labor force participation for the G-20 major economies and the 34 OECD countries sheds important light on the trends in labor force participation. The U.S. unemployment rate is as sensitive to the number of people seeking employment (i.e. wanting to participate) as it is to those who are employed. There has been a significant decline in labor participation in the U.S. partly due to age/retirements and some level of disillusionment. However, the ILO data confirms that the U.S. trend is not unique. A notable explanatory factor on total participation for 19 of the G-20 major economies and 32 of the 34 OECD countries is a drop in labor force participation rates for men. Globally, this reflects the aging of the male populations. Conversely, participation by women is increasing in most countries.
Consequently, total labor force participation rates are heavily influenced by the participation rates for women. Hokenson’s research shows that the aging of the workforce and consequent decline in participation in Europe and Japan are more severe than in the U.S. The decline in the U.S. participation is a serious issue, but we are relatively well positioned versus our competitors.
The political arguments about the unemployment rate seem to miss the point that a decline in unemployment because of lower participation is a bad thing. Economic growth is correlated to the size of the working population and the productivity of that workforce. Clearly a decline in the size of the workforce puts significant extra strain on productivity. This will create structurally lower rates of economic growth in most of the developed world. In turn this may create three structural policy responses:
- Interest rates will remain historically low as politicians use mounting debt to combat the lower availability of labor and lower growth rates. Of course, inflation pressures increase as true labor capacity becomes tighter. The resulting opposing pressures on monetary policy are obvious.
- The higher ratio of those outside the workforce to those in the workforce (the dependency ratio) will prompt politicians to raise taxes to pay for the retirement/healthcare benefits they rely on so much to garner political support. Add to the increase in the number of retirees and their increasing longevity and we can expect the tax burden on those working to keep increasing.
- Immigration policy must be resolved. If the natural birth rate is not sufficient to replace the workforce, a thoughtful approach to immigration must be developed. The declining population issues in Japan are clearly exacerbated by very low immigration.
In creating a strategic asset allocation model, we must take these trends into account. Investors should also consider the implications for sectors such as housing and healthcare. I have been investing in companies focused on diabetes for several years based on these demographic trends, but there are other specialties that will come to prominence as these trends develop. Geographically, I would recommend investors consider the relative advantage that several emerging countries and the U.S. have relative to western Europe and Japan. However, keep in mind that not all emerging economies have this advantage. For example, Russia and China (with its one child policy) both face significant challenges for future growth according to Hokenson.
This doesn’t exclude tactical reasons to buy European or Japanese securities. There will be companies that are very competitive despite having their headquarters in Europe or Japan. Additionally, broad market valuations may reflect the relative demographic disadvantages. However, that type of tactical valuation timing requires skill and finesse. While catching a falling knife makes a great circus act, it is not an investment strategy I would recommend for most investors.