31 July 2020
8 minute read
By Damian Payiatakis, London UK, Head of Impact Investing and Olivia Nyikos, London UK, Investment Analyst
Aging populations and other demographic megatrends appear set to reshape the world. Not least in a shift to a more inclusive society. Long-term investors gaining exposure to this trend in their portfolios might enhance returns while making a positive difference.
Investors seeking to benefit from long-term trends should consider the maxim that “demography is destiny”. With changing demographics, across age, geography and gender, the world will look considerably different.
Investors can find opportunities by understanding how demographic shifts will change the nature of how we work, live and age as well as how power and wealth shift between the groups. For this, we consider five main demographic trends to look at the shape the next few decades might take.
The world’s population is growing older, with the number of over-65s expanding the fastest (see figure 1). According to the UN’s World Population Prospects 2019, one in six people will be at least 65 years old (16%) by 2050, up from one in 11 in 2019 (9%). By 2050, one in four persons living in Europe and Northern America could be aged 65 or over. Furthermore, those that are 80 years or over are expected to triple to 426m in 2050 from 143m in 2019.
The longevity and consumption power of an aging population should provide opportunities for investors who can ride this wave of demographic trends. Among other things, increasing longevity has been due to improvements in sanitation and healthcare practices, lower infant mortality and fewer births. However, the next phase of increasing longevity is likely to be shaped by technology and ever improving healthcare.
The next phase of increasing longevity is likely to be shaped by technology and ever-improving healthcare
Overall, increased life expectancy is boosting the population of older, healthier individuals and should drive significant growth in the healthcare market. According to the Organisation of Economic Cooperation and Development (OECD), healthcare spending is set to increase to 12% of gross domestic product in 2060 in developed economies and to triple in emerging markets.
Investors can gain exposure to companies engaged in health-related products and services, pharmaceuticals, biotech, medtech and other technologies that address chronic and age-related illnesses. Investing in these industries should allow portfolios to be well-positioned to profit from rising life expectancy trends – directly through health-related products and services or indirectly via technology and artificial intelligence businesses.
In addition, older generations collectively control a significant share of global wealth and have considerable spending power that has the potential to alter the global economy by the generation living longer and healthy lives.
We expect healthy-living industries, sustainable travel and tourism, and financial services to see a substantial boost.
Investors might consider opportunities that look beyond health and contemplate the increased vitality and new consumption patterns of the aging population, as well as how such lifestyles will be funded.
Moving to younger generations, millennials and generation Z (Gen Z) also stand to change the global economy. When thinking about investing, much of future growth seems to lie with these two cohorts.
Millennials, which may be thought of as those born between 1981 and 1996, currently make up most of the workforce. They are known for being digitally connected and for wanting new experiences, work-life balance, social collaboration and prefer to invest in alignment with their personal values. Born since 1997, Gen Z are only just entering the workforce, however, are also technologically savvy, entrepreneurial, pragmatic and value diversity and more sustainable life in general.
The two generations hold much purchasing power and may be poised to receive $30-68 trillion during the “great wealth transfer”, passed down by the Baby Boomers. Due to the inevitable intergenerational wealth transfer, their sizeable population and investment preferences, millennials and Gen Z will significantly disrupt the industry and the future of investments.
According to various studies, more than 80% of millennials and Gen Z select financial assets that align with their values and support sustainable investments. Besides integrating their investments with technologies, young investors tend to value products catering to their social and environmental values. Furthermore, they expect them to be delivered by companies that provide clear and transparent communications about their actions and policies.
Given this transfer, there seems a big opportunity for companies that consider wider stakeholder groups and those able to meet the sustainability preferences of this cohort.
The OECD estimates that middle-class spending in emerging markets will increase to nearly 70% of global consumption by 2050, from 25% in 2009
Over the coming years, emerging markets will increasingly be the primary contributors to global growth and wealth accumulation. This follows relatively sustained economic growth, an expansion of the middle class benefiting from increased wages and more ability to save and invest.
The OECD estimates that middle-class spending in emerging markets will increase to nearly 70% of global consumption by 2050, from 25% in 2009. As such, consumption is likely to be increasingly dominated by the middle class in emerging markets, especially as this group is expected to reach 4.9bn by 2030.
In the past decade, emerging economies with abundant natural resources (Russia and Kazakhstan) or large populations (Brazil, India and China) have come to prominence. These areas have tended to be dominated by agriculture and low-cost, labour-intensive industries. However, these trends will probably lose influence, as demographics, urbanisation and innovation play a larger role in prospects for countries in coming decades.
The prospect of more streamlined communications, efficient production and greater productivity seems set to create fresh investment opportunities
New technologies are changing the way various organisations interact with each other. Emerging markets have become home to some of the world’s most innovative companies. The digital revolution has given birth to some industries and leapfrog technologies, such as fintech and artificial intelligence, that along with the data gold mine offered by the internet-of-things might refashion societies considerably. The prospect of more streamlined communications, efficient production and greater productivity seems set to create fresh investment opportunities.
Emerging markets are set to continue growing faster than advanced economies, with inflation at low and manageable levels and with accumulated wealth, and a rich, expanding middle class.
Active management and selection appear key to capturing alpha from emerging market opportunities, especially given that volatility may be higher over some periods of time. The prospects on offer in EM, with its relative discount to developed markets, makes the asset class a long-term component that investors should consider when structuring portfolios.
Achieving gender equality in the labour market could boost global annual GDP by $12 trillion by 2025
Improving gender equity and empowering women around the world is not just an altruistic pursuit; it can also increase economic growth, bolster well-being to all stakeholders and create new investment opportunities.
Gender inequality is not only a pressing social issue, but the lost economic opportunity embedded in it is also profound. According to a McKinsey & Company study, achieving gender equality in the labour market could boost global annual GDP by $12 trillion by 2025. These issues have driven much of the growth in various investment opportunities that are not only impact-driven and address gender inequality, but also generate returns attributed to the faster economic growth associated with gender equity.
So-called gender-lens investing1 is one approach that investors can consider. One that has quickly gained traction. It is the practice of investing for financial return through the lens of female empowerment. It is an investing approach that deliberately incorporates the desire to make a difference in the lives of women, takes into consideration the power of their leadership and the solutions to challenges females may face. As defined by the Global Impact Investing Network, this is done through investing in:
Despite underrepresentation in the workforce and in legislatures (see figure 2), positively empowering women can improve society and the economy and may boost a company’s profitability and return on investment.
When tackling gender equality and its impact on growth through entrepreneurship, it is beneficial to this objective to get more women involved. Especially as research finds that women entrepreneurs appear more purpose-driven and may be more often motivated to start or run a business to make a difference in the world. In turn, this could make a difference to the success of these businesses.
Indeed, many governments and organisations around the world now regard entrepreneurship as a vital part to promoting women’s empowerment and helping to find business solutions to the world’s social and environmental challenges.
Despite the UK being the start-up capital of Europe, only 5.6% of women run their own companies
In the UK, advancing female entrepreneurship represents a £250 billion opportunity for the economy, according to the Alison Rose Review of Female Entrepreneurship. However, despite the UK being the start-up capital of Europe, only 5.6% of women run their own companies. This compares with almost 15% of women in Canada and 11% in the US. Furthermore, the group is also underrepresented in the most productive, high-value sectors such as financial services, IT and communications, and manufacturing.
Female entrepreneurs face barriers such as access to funding, risk awareness, primary care responsibilities and perception of skills. Even so, efforts similar to adopting the Investing in Women Code by 22 financial institutions and establishing local enterprise partnerships across the UK should allow women to take a stronger and more robust role in the economy.
Organisations are facing a turning point – consumers and employees are now looking for more than the standard corporate social responsibility and diversity, equity and inclusion practices promoted over past decades. There appears to be a growing expectation that companies have more of a role and responsibility for social equity2 as well as a wider group of stakeholders in society, such as employees, customers, the community and shareholders.
As companies demonstrate greater awareness and aim to consider the range of their stakeholders, they can help meet this fundamental shift driving a growing desire from employees and consumers to better reflect social equity and diversity.
Research shows that diversity brings various advantages to organisations, including increased profitability, stronger governance and better problem-solving abilities. Executive teams ranking in the top 25% for racial and ethnic diversity were 33% more likely to gain financial returns above the national median for their industries, according to studies by consultancy McKinsey & Company. Executive teams that embraced gender diversity were also more competitive and 21% more likely to experience above-average profitability, with a 27% likelihood of outperforming their peers on longer-term value creation.
Furthermore, there is a real economic opportunity to be gained from creating more inclusive economies. It has been estimated that closing the gender gap entirely would add $28 trillion to the value of the global economy by 2025.
Closing the gender gap entirely would add $28 trillion to the value of the global economy by 2025
Many consumers and other stakeholders want companies to embed diversity and social equity in the organisation, rather than making it a marketing strategy and box-ticking exercise. It comes as no surprise then that the number of businesses wanting to both support their employees and upskill their workforce around diversity and inclusivity is unprecedented.
Companies cannot afford to do nothing, as reputational risks could have adverse financial consequences. Furthermore, investors also should consider the growing importance of the above fundamental shift when selecting their investments.
Investors genuinely committed to diversity and equity – not only in the world around them but also within their investment portfolio – should invest accordingly. In doing so, they may contribute to a healthier and mutually beneficial relationship between businesses and the communities in which they interact.
The pandemic may be most on investors’ minds for now. But a series of long-term, structural megatrends are likely to have a larger impact. Our investment experts look at the impact globalisation reversion, demographic shifts, building a sustainable world and the pending revolution in “smart” everything may have and how you may profit from them while making a difference to the world.
Barclays Private Bank provides discretionary and advisory investment services, investments to help plan your wealth and for professionals, access to market.
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