Emma Mogford
Premier Miton Monthly Income Fund Manager
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Seismic demographic shifts
As we enter a new market regime, investors are faced with unprecedented challenges. Investors and asset managers alike need to think differently about how they are investing for income. Embracing seismic demographic changes should be part of that in my view.
Demographics are defined as the collection and analysis of general characteristics about groups of people and populations, such as age, gender, and income. However, these characteristics are not static and demographic changes are starting to create powerful knock-on effects in the 21st-century economy. As a result, major demographic trends offer both unique challenges and opportunities for investors.
A rapidly aging population
It is well documented that the global population is aging rapidly as fertility rates decline worldwide and those in the 65 years and older age bracket are steadily living longer. While there are many charts, statistics and reports analysing this trend there is one simple data point I regularly refer to:
Fifty years ago, the median age of the world’s population was 22, today it is 31, and by 2050 it will be 36, according to United Nations projections.
This has enormous and fundamental implications for consumer preferences, which in turn will decide the fate of entire industries as new technologies and commercial ecosystems come into replace old products and services.
From an investment perspective, the evolution of the global population structure has lengthened the consumer life cycle. A steadily aging population is slowly shifting the purchasing power to older households. This clear shift does beg the question however ‘who will then be in the workforce?
A revolution in earning power
As the population continues to age, fewer people are available to work and effectively sustain the working population. However, the disproportionate growth of the retiree population does seem to be a universal phenomenon – hence the challenge of considering demographic trends on a global scale.
Counterintuitively, the numbers of retirees in emerging markets are expected to grow more steeply from a lower base than the developed markets. The increase in the working age numbers, on the other hand, seems confined to the emerging markets. By the UN’s count (as at November 2020), looking forward to 2039 and making an informed estimation, nearly nine out of ten people aged 5 – 24 years old will live in less developed regions of the world. Crucially, this growing cohort has the potential to become a key consumer segment.
Investment opportunities uncovered
The demographic shifts described create compelling investment opportunities for investors. Take Unilever’s Indian business, this has nearly doubled in the last 5yrs as a growing and sizeable middle class has started using their ranges of core cleaning and household products. Unilever is a prime example of a UK company, with all the corporate governance you would associate with a major UK company, but it offers direct exposure to a fast-growing market like India. This comes without the risks associated with poor intellectual property rights and weak corporate governance which could come from investing directly in these markets.
Looking more closely at Unilever, focusing in on their most important markets: 58% of their turnover in emerging markets. But as a UK listed company it’s been part of the great ‘UK sell off’ we have seen in recent times – where solid, fundamentally sound companies have been deemed unattractive next to their tech heavy cousins.
The 100-year life
My second example is a slightly different take on the demographic trend which is ageing. In the book ‘The 100yr life’ I learnt that most of these extra years in retirement are spent in good health, so anything that can enhance quality of life will be in demand and that’s where we see opportunity. Smith and Nephew, for example, which have a strong business line in orthopaedics is a quality business in our view but is another good example of a company captured as part of the mega sale we have seen in UK equities.
Defence and demographics
An argument can be made for and against the positive impacts of military expenditures on economic growth. What is not for debate though is that since the end of the Cold War in 1990, defence spending here in the UK has declined both as a share of government spending and of the economy’s total output. This has made room for other forms of public spending, such as on education, health, and infrastructure.
However, this trend is reversing and indeed accelerating, and the world is arming itself to the proverbial teeth. World military spending continued to grow in 2021, reaching an all-time high of $2.1 trillion according to SIPRI (Stockholm International Peace Research Institute). This was the seventh consecutive year that spending increased. Military spending as a share of global GDP has fallen in recent years, but that offers little reassurance in a world of rising geopolitical tension.
BAE systems total % return including dividends over a decade
Source: Bloomberg from 30.04.2013 to 18.04.2023. Past performance is not a reliable indicator of future returns.
The chart directly above is showing the total return from investing in BAE over the last 10 years, a return of 305% which is 200% more than the FTSE All-Share. This is one of our larger positions at 4.2% (as at 31.03.2023) of the Premier Miton Monthly Income Fund.
Looking again at BAE, a key point that investors may miss is the impact its dividends have had – being a strong element of the total returns in the last 10yrs. This is a company which really care about dividends having just delivered their 17th year of growing that dividend.
Demographic trends, including population ageing, population growth, migration and urbanisation have important implications for military expenditure and as the current world power order shifts, superpowers have an increased desire for both security and influence on the world stage. This could be worsened by deglobalisation affecting alliances and climate change driven migration leading to an increasing spend on border control, which is part of overall military spending.
Final word: Demographics create opportunities
While changes in global demographics will bring significant challenges and opportunities for societies and businesses, we believe that finding companies that offer products, services, and technologies that are positively exposed to the dynamics of changing demographic and consumption patterns, can uncover some attractive long-term investment opportunities.
