Ageing demographics and the effect on capital markets

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Originally published at: Ageing demographics and the effect on capital markets – InvestEngine Insights

This content is part of a sponsored partnership with Xtrackers. It is for educational purposes only and does not constitute investment advice. Capital at risk.

The world population continues to grow; while at the same time an increasing number of countries are seeing their populations stagnate or even shrink due to lower fertility rates or due to substantial emigration. According to the United Nations (UN), over one in four people globally live in a country whose population has already peaked in size.1 At the same time, life expectancy increases and the world’s population is ageing. The UN’s research ‘World Population Prospects 2024’ estimates that by the mid-2030s, people aged 80 and over will outnumber infants (1 year of age or less), reaching 265 million and that the proportion of people aged 65+ will double in the next three decades2.

Old age dependency ratio rises sharply

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By 2050, Asian countries are expected to have the highest proportion of this age group. The problem is already acute in Japan and other Asian economies are following, as life expectancy increases rapidly. By 2050, around 40% of the population in Hong Kong, South Korea and Japan will be aged 65 and over, compared with just 20% in many developed countries.3

No doubt, this ageing population trend will create considerable consequences for the global economy and financial markets.

Potential economic impacts from an ageing population

So, what are the implications for investors as we enter the “Silver Economy,” one that needs to pivot to fulfill the needs of a graying population? Let’s have a look at six developments that might occur due to the changing demographics.

  1. A Slowing Economy. Without strong countermeasures, an ageing population is likely to have significant impacts on many aspects of the economy, including a smaller workforce, higher labor costs, weaker economic output and growth, and declining government tax revenues, thus creating a dwindling scope for government investment and the potential for increased taxes or reduced benefits.
  • Pension Time Bomb. An ageing population places additional burdens on already stretched public pension schemes, threatening their viability, and potentially leading to funding gaps in other important government services. In Germany, for example, around 21% of the federal budget will already be spent on the first pillar of the pension system in 2024.4
  • Health Issues on the Rise. As the global population ages and life expectancy increases, the demand for expanded and specialized health treatments, medication, and healthcare services, including home care and advanced medical treatments will undoubtedly increase.
  • Decline in Equity Investing. As individual investors transition into their “Golden Years,” they historically allocate their holdings out of equities and into more conservative instruments during their retirement years, in an effort to dial down investment risk.5 As the investment population ages, this trend can potentially have a broad impact on equity investing.
  • Asset Allocation Shifts. A recent survey of institutional and intermediary investors by Coalition Greenwich noted that after new technologies, an ageing population was cited as the most significant factor shaping their investment strategies. Industries that were considered most appealing were Healthcare (91%), Technology (84%), Energy (67%), Agrifood (63%) and Tourism (60%).6
  • The Affluent Seniors
    A significant portion of the senior population will have the disposable income to truly enjoy the retirement years. Active affluent seniors will be eager to travel and vacation and focus on their health, nutrition, and personal fitness. Businesses that focus on catering to this demographic can potentially achieve an increase in sales volumes and profitable returns.

Where to Find Investment Opportunities? Could Healthcare be the answer?

While there are negative implications for global economies and markets as the world’s population ages, new investment opportunities are being created that focus on serving the ageing population.

Personalized Medicine. One of the fastest growing areas, personalized medicine is having a profound effect on healthcare. This is an approach that tailors treatment based on a patient’s specific genetic makeup, enabling physicians to make more informed and effective decisions about a patient’s care. Personalized medicine is effective in the prevention, diagnosis, and treatment of disease. For example, genetic testing enables doctors to screen for specific diseases based on family history and assist in the early detection of hereditary forms of breast, ovarian, and prostate cancer.

Generative AI. Artificial Intelligence – especially Generative AI – is already having an impact on healthcare, analyzing medical images such as X-rays and MRIs with high efficiency, interpreting results, and offering personalized recommendations. Generative AI is also making its presence felt in areas such as robotic surgery, predictive analytics, and accelerating the time and cost to bring new drugs to market.

Preventative Healthcare. Research shows that a switch from reactive to proactive approaches to maintaining good health (such as exercise and immunizations) creates long-term benefits for patients, including reducing the costs of treating preventable conditions.

Elderly Care. As global populations continue to grow older and people live longer, there will be increased pressure placed on the healthcare systems required to take care of this ageing population. There will be a demand to provide solutions that will enable the elderly to remain in their homes longer, as opposed to living in hospitals or nursing homes. This growing demographic shift also creates a substantial demand for new senior living facilities, both in creating affordable housing solutions as well as luxury living for affluent seniors.

Virtual and Augmented Reality. These technologies have the potential to change how new types of treatment and diagnostics are delivered in highly immersive and realistic ways. For example, an AR system can help guide a surgeon by overlaying medical images to help guide the procedure.

There are three Xtrackers MSCI ETFs available here on InvestEngine that offer exposure to many of the healthcare investment themes outlined in this article covering USA Healthcare, World Healthcare and Good Health.

Glossary

Augmented reality:  A technology that overlays computer-generated images, sounds, or other sensory inputs onto the real world, enhancing the user’s perception of their environment.

Demographics: Refers to the statistical characteristics of human populations, such as age, income, education, and employment. These statistics are used to identify and analyze different segments of a population, often to understand trends and make informed decisions in areas like marketing, policy-making, and social research

ETF: An Exchange Traded Fund (ETF) is a basket of securities that tracks an underlying index.

Generative AI: Artificial Intelligence that can create new content, capable of generating text, images, videos, or other data using generative models.

IMF: The International Monetary Fund (IMF) is an international organization that aims to promote global economic growth and financial stability, encourage international trade, and reduce poverty.

Pension scheme: A retirement plan that requires an employer to contribute to a pool of funds set aside for a worker’s future benefit.

Silver economy: The system of production, distribution, and consumption of goods and services aimed at utilizing the purchasing potential of older and ageing people.

Virtual reality: A computer-generated simulation of a three-dimensional environment that can be interacted with in a seemingly real or physical way.

Sources

  1. World Population Prospects 2024, United Nations as of July 2024
  2. World Population Prospects 2024, United Nations as of July 2024
  3. DWS, CIO Special, September 24, 2024
  4. Der 477-Milliarden-Haushalt: Wofür der Bund das Geld ausgibt, BR24 as of 2/2/24
  5. Federal Reserve Board, “Distribution of Household Wealth in the U.S. Since 1989 – Corporate Equities and Mutual Fund Shares by Age,” 2024
  6. Survey Conducted by Coalition Greenwich, May 2022

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