25th October 2011
There is a great deal of debate about what it means for economies, stock markets and the prospects for humankind as a whole.
A report by HSBC published earlier this year, while noting the pressure on resources especially water, also had this stark message for the developing world, that economies with falling populations grow significantly less quickly. Obviously in these difficult economic times, these economies must be at greater risk of contraction.
The World in 2050 report said: "In the coming decade, average GDP growth should be 1.5 per cent higher in the US than in Japan based on demographics alone. India's GDP growth should be more than 2.5 per cent higher than Japan's for this reason.
The report does however identify significant pinch points notably the potential for a lack of water and cultivatable land to restrict growth with some obviously grim consequences although it is not entirely pessimistic.
It said: "Energy availability need not hinder this path of global development so long as there is major investment in efficiency and low-carbon alternatives. Meeting food demand may prove more of a challenge, but improvements in yield and diet could fill the gap."
Mulling the issue this month, the Economist suggests that the Malthusian argument is gaining ground illustrated by the high prices of scarce resources such as certain metals.
Thomas Malthus was a highly influential 19th century political economist who suggested that population would outstrip food resources before being restrained by famine, war and disease. Malthus' ideas were confounded by technological developments in agriculture including the post Second World War green revolution, regarded as the reason South Asia in particular did not face severe food shortages but there have been other dramatic increases in production since the days of Malthus's warnings.
Therefore up until the 1990s it looked as if technology and productivity gains stirred by rising populations could continue to prove Malthus wrong. Yet the resource scarcity of the last ten years may be prompting a rethink – with neo-Malthusians such as Paul Erhlich back in fashion.
However there are other arguments against a Malthusian nightmare even as we pass seven billion. First, the long term trend is for population growth to fall with development, and that can represent a huge boost to an economy as the Economist notes.
It says: "When the number of children a woman can expect to bear in her lifetime falls from high levels of three or more to a stable rate of two, a demographic change surges through the country for at least a generation. Children are scarcer, the elderly are not yet numerous, and the country has a bulge of working-age adults: the "demographic dividend". If a country grabs this one-off chance for productivity gains and investment, economic growth can jump by as much as a third."
However the magazine comes out against strict population controls suggesting that China's one child policy will lead to all sorts of problems.
"Whenever the state has pushed fertility down, the result has been a blight. China's one-child policy is a violation of rights and a demographic disaster, upsetting the balance between the sexes and between generations. China has a bulge of working adults now, but will bear a heavy burden of retired people after 2050. It is a lurid example of the dangers of coercion."
There are definitely big trends – sometimes referred to as mega-trends for investors to pay heed to. Emerging economies should definitely see more growth, but investors need to consider how much this translates into stock market growth as one does not necessarily directly correlate with the other. Countries will also have to be aware of how they manage their resources but there is still a strong investment case and investors should at least consider the issue before deciding on an asset allocation. This also applies to some extent to commodities including agriculture, though there is a developing and heated debate concerning investment in agriculture versus local development so if you have concerns you should check with your fund manager about their policies.
There is also another side to the coin. Some fear that falling populations and increasing dependency ratios in the developed world spell trouble for equity market valuations.
This article by Zheng Liu and Mark M. Spiegel of the Federal Reserve of San Francisco suggests that the gradual retirement of the baby boomers will affect equity market.
They write: "In the context of the impending retirement of baby boomers over the next two decades, this correlation portends poorly for equity values. Moreover, the demographic changes related to the retirement of the baby boom generation are well known. This suggests that market participants may anticipate that equities will perform poorly in the future, an expectation that can potentially depress current stock prices. In that sense, these demographic shifts may present headwinds today for the stock market's recovery from the financial crisis."
Perhaps it might be better therefore to consider the smaller trends within the mega-trend.
Earlier this year, This is Money reported on fund manager Fidelity suggesting that in the UK, healthcare is an obvious long term bet because of the growing number of retirees.
Here on YouTube, KPMG demographer Bernard Salt discusses Australia's similar population dilemma – but it suggests the country will choose more immigration rather than raising taxes or cutting retirement benefits and that will therefore raise property prices long term.
All this suggests that investors would do well to consider demographics when they consider investing. As for the huge issue of what seven billion people and risi
ng means for the planet and its environment, remains very difficult to predict. The arguments between those predicting disaster and those who suggest eventually human ingenuity and societal changes will come to the rescue look set to rage.
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