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Published on May 14, 2010

Opinion: U.S. demographics can point the way for long-term investing

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BERWYN, Pa. (May 14, 2010) — It's one of the great underreported stories of our time: The world's population, now 6.8 billion, might peak at 9 billion and actually start to decline, not rise, in the decades ahead.


One notable exception could be the U.S., whose current population of about 318 million might rise by 27 percent between now and 2050, according to the United Nations' Population Division.


A growing U.S. population has potentially profound and mainly positive economic repercussions. If it's true that demographics is destiny, then demographics especially influences destiny in this way: When a nation has more working-age adults than it has elderly adults, as the U.S. will in the decades ahead, its economy tends to grow at above-average rates.


If most of a nation's population is of working age, productivity tends to rise, producing what's called a “demographic dividend” of economic growth. Conversely, when a nation has a large number of seniors relative to working-age people, its economy tends to be constrained.


For investors, demographics can be a fertile field to plow for this reason: Demographics can help determine which industries are likely to prosper and provide potentially lucrative investment opportunities. If nothing else, demographics can help investment managers to view things through a long lens, to think in increments of 10 years or more. We think there's something to be said for that kind of a perspective in a business where the mentality at times seems to equate the long term with the next three hours.


Growth market: seniors


For instance, the biggest growth market in the U.S. (and worldwide) is likely to be seniors, who will bring about an increase in all of the maladies that normally accompany old age, such as heart disease, cancer, dementia, lung disease, stroke and arthritis. That in turn could fuel greater demand for drugs, medical devices and all manner of health-care services—and for stocks in those industries.


Also, a sizable young American population would help bolster consumer spending, to the advantage of the U.S. economy and industries such as consumer electronics, Internet services, apparel, wireless communications, banking, insurance, investment management and housing.


That's right, housing.


The more than 3 million Americans who are currently trying to sell their homes might find this hard to fathom, but the demand for housing might not stay anemic forever. We think the housing market will probably grow at a rate at least equal to that of the U.S. population over the next 40 years.


What's more, we think the U.S. will remain a huge market for 401(k) plans and individual retirement accounts. In the decades to come, young Americans may be compelled to invest early and often for retirement to counter the prospect of their receiving reduced Social Security benefits, in response to long-term pressures on the federal budget to support the elderly.


In contrast, the market for defined benefit plans might grow only modestly. We anticipate that the shift from defined benefit plans to 401(k) and other defined contribution plans is likely to continue. In our opinion, employers with substantial union work forces figure to be the most willing to maintain defined benefit plans, and stocks and alternative investments are likely to be major allocations in those plans because of their high-return potential.


Aging slowly in the U.S.


Even though the percentage of U.S. population ages 25 to 64—the pool of working adults—is expected to drop to 49.6 percent in 2050 from 52.7 percent in 2010, the U.S. likely will age more slowly than will other developed nations such as the United Kingdom, Germany and Japan.


As a result, despite all the apocalyptic fiscal projections about entitlement programs such as Social Security and Medicare, the economic prospects of the nation might be brighter than popularly imagined.


The reason prospects are brighter is simple: The U.S. seems destined to have the highest ratio of workers to seniors among the world's developed nations. For instance, in 2050 the U.S. ratio of workers to seniors is expected to be 1.14, compared with 1.05 in the United Kingdom, 0.65 in Germany and 0.48 in Japan. Believe it or not, the ratio of workers to seniors in the U.S. should be even higher than that of the biggest economic mover and shaker of recent years—China.


Overall, the good news is that the U.S. and other developed nations like Canada and Australia, and developing nations like Argentina, India, and Malaysia, have perhaps the most favorable long-term economic potential, in light of their relatively high percentage of workers vs. seniors and their prospective rates of population growth exceeding 25 percent. The bad news is that the U.S. and most developed and developing nations have growing numbers of seniors and thus must cope with enormous potential liabilities on their government balance sheets. The percentage of the world's population over the age of 60 should double in the next 40 years, to 22 percent in 2050.


For the U.S., the fiscal burdens of supporting a rapidly aging population might be much less onerous than those for France, Germany, Italy, Japan, and Spain, which will become figurative old-age homes in relative terms. Over the next 40 years France, Germany, Italy, Japan and Spain may suffer population losses of 20 percent or more—a collective loss of people comparable to that of medieval Europe during the Great Plague.


In short, the world is getting older much faster than before. But fortunately the U.S. is aging less fast than much of the world and may end up stronger economically for it.



Robert E. Turner is chairman and chief investment officer of Turner Investment Partners in Berwyn, Pa. This opinion piece originally appeared in Pensions & Investments magazine, a Chicago-based sister publication of Tire Business.

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