The sectors benefiting from changing demographics

Any sailor will tell you that it’s a lot faster to go with the wind than against it. It is the same for investors and demographics. While understanding demographic shifts is not a guaranteed path to riches, it can direct investors to sectors and regions with a tailwind of growth.

Many fund managers will look at demographics as a core part of their macroeconomic analysis. Alex Araujo, fund manager on the M&G Global Listed Infrastructure fund, for example, says: “In the developed world, populations are growing older, due to medical advances and health awareness, and more productive, due to technology. This means changing consumption patterns, buying power and behavioural shifts. In the developing world, migration to major cities continues, driving demand for digital and physical infrastructure and enhanced mobility.”

However, Philip Matthews, co-manager on the WS Wise Multi-Asset Growth fund, cautions that it is not as simple as just investing in areas with good demographics: “There is no empirical evidence that investing in countries with higher economic growth will lead to better investment outcomes.” Instead, investors need to look at the individual sectors and industries likely to benefit from shifting demographics.

With that in mind, there are four key areas where an analysis of changing demographics can lead to a range of opportunities: healthcare, technology, financials and infrastructure.

Healthcare

The Polar Capital Global Healthcare team, which manages the Polar Capital Global Healthcare Trust, considers the healthcare sector to be by far the best play on the theme of shifting demographics: “As humans age, the demand for healthcare increases, accelerating from around 60 years of age. This manifests in different ways and impacts all parts of the healthcare industry. The impact of demographics is broad-based across the sector with pharma, biotech, MedTech and healthcare services all exposed to this trend.

“We take a different view to some in our approach to this. In developed markets, we are more focused on the cost pressures that these demographic trends are placing on healthcare systems. We try to invest in companies that sell products and services that make the provision of healthcare more cost effective, acknowledging that the demographic pressures are making the price of delivering access to healthcare unsustainable.”

They have a different approach in emerging markets, where healthcare spend is far too low. The opportunity is more about long-term growth over decades as access to healthcare shifts dramatically.

Philip Matthews agrees that healthcare, pharma and biotech companies will see larger addressable markets and are in a good position to help governments reduce their ever-growing social care costs.

However, he adds, investors always need to consider valuations.

At the moment, he sees more opportunities in biotechnology than traditional pharmaceuticals: “Valuations in biotechnology have suffered a three-year bear market, valuations are low whilst the companies themselves companies are developing exciting, innovative therapeutic treatments just as large pharma companies are facing a fall in revenues as protective patents fall away. The WS Wise Multi-Asset Growth fund holds RTW Biotech, International Biotechnology Trust and Worldwide Healthcare Trust in this area.”

However, Debbie King, co-manager of Aegon Diversified Monthly Income, says it is worth considering how the impact of demographics may not have the expected effect on healthcare: “Ageing populations may be healthier than we think due to healthcare reform and a better understanding of health and wellness generally. Increased and healthier life expectancy has implications for the percentage of working age population; if the new mid-life crisis is 50 years not 40 years old, then people work for longer and retire for longer. This has implications not least for economic growth potential and consumption trends but most obviously the ongoing need for medical care (preventative as well as reactive care) as cradle to grave is meaningfully extended.”

Watch to learn more: Navigating the future of healthcare investments

Financials

Financials are another area influenced by demographics. Banks, for example, can be a natural play on economic growth and growing financial inclusion as populations grow and become wealthier. The GQG Partners Emerging Markets Equity fund has a theme running through its portfolios on the financial sector in Brazil and India. Co-manager Sudarshan Murthy says: “The anticipated growth of banks is driven by a transition to a cashless economy and the proliferation of mobile banking, which extends financial services into rural areas. Furthermore, the cross-selling of financial products and the modernization of payment systems are likely to bolster sector profitability.”

Professional adviser? We hear more about the GQG Partners positioning to banking in our May 2023 update

There are also opportunities in developed markets. An ageing population has more need for financial products, such as pensions, life insurance or private healthcare. Philip Matthews from Wise says this is particularly acute in countries where government provision is waning. “As governments have less money to spend individuals will look to supplement government benefits they historically took for granted, such as pension-savings, private medical insurance and care costs.”

Technology companies

Technology companies have a role in helping solve the productivity gap creating by a smaller workforce. David Harrison, manager of Rathbone Greenbank Global Sustainability fund, says: “As populations age, we are seeing a strong need to invest in technology and automation. This trend is already underway, but we are still at a relatively early stage in many industries. Equally, the impact on healthcare systems is likely to be significant in the next 20 years as the number of people living well past retirement age continues to increase.

“About a quarter of our portfolio is invested in the technology space, as we view many of these businesses as structural winners from long-term demographic trends, while being financially strong.  A business such as Microsoft enjoys a clear tailwind from increased investment in software and is integral to any efforts to automate processes. ASML, which is listed in the Netherlands, is a critical cog in semi-conductor development which will be key to driving further advancement in the future.”

James Harries, manager of Trojan Global Income, also has meaningful exposure to technology in his portfolio, aiming to capture the ongoing digitisation of the global economy: “We have a decent allocation to technology companies ranging from Nintendo (mostly young gamers) to Microsoft (office workers) and Accenture (other companies that are seeking to digitise).”

Infrastructure

Infrastructure is needed to support growing populations and/or urbanisation in countries with strong demographics such as India. According to GQG: “India’s favourable demographic trends, and strategic economic reforms presents a strong case for investing, especially in the utilities and industrials sectors. With the government’s commitment to infrastructure and regulatory efficiencies, companies engaged in building roads, ports, and power generation and distribution networks stand to gain.”

Alex Araujo at M&G agrees that urbanisation brings opportunities: “Data processing needs in cities are rising, for example, which are serviced by data warehouse owners like Segro. Healthy living habits support the investments in bike parts manufacturer Shimano and gym clothing designer Lululemon. These structural trends ensure compounding growth opportunities over and above macro-economic cycles.”

Demographics isn’t destiny. Good demographics don’t automatically deliver strong economic growth. However, they can be a useful tool in identifying key areas of growth in the global economy and should ensure that your portfolio has the wind in its sails.