Megatrends: Demographics and the ageing world

From
Charles Stodart

Charles Stodart

It’s been dubbed the ‘Age War’. We’re now living longer than ever before thanks in large part to advances in healthcare and the adoption of healthier lifestyles. Our rapidly changing demographics – both here and globally – will have a far-reaching impact across all areas of our lives, bringing with it some unique investment opportunities.

Australia is currently navigating its way through unchartered waters. Faced with longer life expectancy and lower fertility rates, the gradual increase in the ‘aged cohort’ is increasingly accounting for a larger and larger percentage of the overall population.[1] And while it’s no secret that we’re living well beyond the retirement age, what’s interesting (or alarming, depending on how you choose to look at it) is that a boy born in Australia today can expect to live to be over 80 years old – or more than 10 years longer than his grandfather.[2] Perhaps of even more significance is the gradual decline in the Dependency ratio (the number of people of working age per retiree). This ratio is an important consideration for the Government in assessing the sustainability of Australia’s welfare and pension programs. Falling fertility rates have also played a part in slowly changing this ratio. What we will likely see in the longer-term is low fertility rates playing a big role in eroding working age populations. Japan provides an example of what might happen. The country saw its working age population peak in the late 1990’s, but since then it has fallen by over 10% to 77 million.[3] What we’re ultimately seeing is that an ageing population, combined with low fertility rates, forces people away from relying on government and family assistance; turning instead to financial markets to fund their own retirement. This longevity risk – the risk of outliving the spending power of your savings – needs to be well-managed now more than ever before. This is especially true when you consider that a decline in the workforce places greater pressure on other economic factors to drive growth, such as productivity. The risk here is that (all else being equal) structural GDP growth could fall.

The investable opportunities in an Ageing World

While it poses many challenges, an ageing world also presents significant investable opportunities. The two key areas of opportunity revolve around:

  • wealth creation in retirement, and
  • aged care services and pharmaceuticals.

Income products are an investment solution for retirees

Traditionally, pre-retirement has been a time to begin reducing your risk exposure from more volatile equities to an asset class that offers more stability and income (fixed interest as an example). But in today’s unprecedented low interest rate environment, this has become a challenging investment strategy. Fixed asset securities are offering less stability and lower income than in the past. Income products have now become the ‘golden child’ of interesting investment solutions. They offer the potential for capital growth, which is vital for managing longevity risk and offsetting the impact of inflation over the drawdown phase. The challenge though, is that while equities can offer both attractive yields and capital growth, they can also add more volatility. A good solution is to identify an unleveraged, low volatility equity product that’s able to use exchange traded options (ie. a product that can be managed to generate attractive levels of income at lower levels of volatility than the overall market). Equity funds with global exposure would offer broader diversification opportunities through a greater universe of investment candidates.

The investable opportunity in healthcare

Healthcare and pharmaceuticals is a significant investable area that’s benefiting from an ageing population. The rapidly increasing number of elderly Australians accessing aged care services is putting a significant strain on resources, and the healthcare industry is currently exploring new ways to allow more people to remain in their homes for longer, while still upholding a good standard of care. The investment opportunities that Zurich is seeing are in the more cost-efficient areas like monitoring, ‘prediction’ and diagnosis. For example, we’re seeing the rise of ‘telehealth’, which is the delivery of health-related services and information via videoconferencing to patients who live in remote areas. Remote monitoring is made possible by the introduction of ‘wearables’. The number of wearable medical devices in the market, which can detect early warning signals for those with acute medical conditions, is expected to continue to increase. The broad adoption of smartphones, which ‘speak to’ these wearables, certainly facilitate this introduction. Within the pharmaceuticals world, huge advancements in medical research in the last few years have opened up significant investment opportunities for today’s investor. Pharmaceutical companies are now incorporating this new information into their research process. Two companies that are worth monitoring include: AstraZeneca: The world’s fifth largest pharmaceutical company has 14 cancer drugs which are in a relatively advanced state of development. It’s believed they will experience peak sales potential of over $12 billion in the next few years. Roche: The global leader in cancer treatments and ‘in vitro’ diagnostics is pioneering ‘personalized healthcare’, with two thirds of their Research and Development budget being spent to improve the efficacy of their drugs. Other sectors to watch include regenerative health, seniors care facilities and grey tourism. The significance of demographic change over time remains undisputable but just how quickly we’ll start to see these changes is harder to predict. It will likely be the way that governments choose to deal with these shifting demographics within their own borders that will decide the pace of change. For investors, the ageing demographic will be likely to influence investment strategies in two key ways. Namely, that investments and the ability to create wealth for retirement will be a growth area, and that servicing our older population (considering sectors like hospitals, health care, aged care, retirement services and even travel) will become increasingly important. By Charles Stodart, Investments Specialist, Zurich Investments

Read other Zurich ‘Megatrends’ articles:

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[1] US Census Bureau, International Database
[2] Australian Institute of Health and Welfare; Female life expectancy today exceeds males by @ 4 years
[3] Economic Research from Federal Reserve Bank of St Louis
SOURCES:
  • “No Ordinary Disruption: The Four Global Forces Breaking All the Trends”, R Dobbs, J Manyika, J Woetzel (Public Affairs, May 2015)
  • Digital Care Services; Harnessing ICT to create sustainable aged care services
  • Australian Institute of Health and Welfare
  • Australian Bureau of Statistics
  • Pew Research Centre, January 2014
Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated August 2015, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich. Past performance is not reliable indicator of future performance. KJUC – 010468-2015

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