Demographics Are Fundamental To Investing
Andy Kessler wrote a great WSJ article on Monday about China and demographics, called “Old Age Will Put China To Rest”. It made me remember how excited we were at Morgan Stanley 35 years ago when we started to collect demographic data outside the United States. Today, in 2019, our access to demographic data has grown exponentially. It’s important we use it.
Better Data Access
Demographic data is mostly tracked and published by government organizations. As with most data, understanding the historical context is key. The quality of the data is much cleaner in the US than in Indonesia or India for example. Chinese data is intentionally incomplete. Given the impact on policy and growth, it’s safe to say that the data is often manipulated.
Three Factors To Watch
Demographic data is slow-moving and therefore doesn’t often qualify as dramatic front-page news. Changes take decades to materialize and you can often see them coming from a long way off. This makes them particularly useful to investors who take them into account.
Three important demographic variables to watch are the average wealth per household, the birth/replacement rate, and life expectancy. The sum of a population’s privately held wealth and its potential for growth will have an outsized impact on its future. Consider how a population will shrink or grow, how long those people will live on average, and how much access they have to wealth.
- Average wealth per household is the best single demographic measure for investors to use. Average wealth is influenced by the replacement rate and life expectancy. Average wealth is among the highest in the United States. Certain countries, however, have serious issues that offset the attractiveness of household wealth. These include anti-immigration policies (Japan) and excessive alcohol and tobacco use combined with low health spending (Russia and China). Constant war (the Middle East) is another offset to increasing average wealth.
- Replacement Rate: 2.1 live births per couple is considered the necessary replacement rate for population growth. In countries like the United States where the live birth rate is 1.7%, we make up the gap through legal immigration. With legal immigration, the replacement rate in the US rises to 2.3%.
- Life Expectancy is the third most useful demographic indicator. As Kessler mentioned in his article, the combination of old age and low net worth makes the demographic profile of China especially challenging. On the other end, young and growing populations like Iran are positioned for productivity.
Policies That Affect Demographics
Can countries purposely change their demographics? Not easily or quickly. Reversing a major demographic trend has happened only once in modern times – in China in 1979. The mandatory One Child policy in China stopped population growth in its tracks. As a consequence, by 2050 the population in China is expected to peak, and then decline. As Kessler explains, 100 years after the One-Child policy, the Chinese population will be 900 million, less than in 1979. The trend is unalterable and has enormous implications worldwide.
I don’t sense that people and investors, in general, appreciate how important a shrinking population in China would be to the rest of the world. A shrinking population prevents the Chinese government from carrying out their policies. These policies range from an enormous standing army to consistent high reported growth and to power through numbers in any way possible. Since China is a command and control country they can get away with this until their growth starts stalling and can’t be hidden.
Using Demographics To Avoid Losses and Capture Gains
As an investor, you can apply demographic considerations to almost any investment, from local real estate to foreign equity. Consider the real effect of currency when investing outside of the US. Add other filters such as the size of the investable market, percentage of market concentration, and ownership structure, just to name a few.
This topic is a great reminder that events that may seem so important for investing are quite short when compared to the demographic trends over time. Recessions, political changes, and even invasions and wars begin and end much faster. We encourage you to expand your thinking to include the timeline of long-term demographic trends and welcome the opportunity to discuss what they mean for investing today.