Why demographics matters for all investments

Demographics is a topic that everyone seems to opine, project, mystify and elaborate on as it is topical.

However, as an investment researcher as well as one focused on pensions, I followed Peter Drucker who said that people do not follow demographics, which is an important area, and when they do follow, they “miss the point”. For the last 24 years, in a Druckerian spirit, I have as a researcher recast the focus of demographics on two major characteristics of individuals—that as a consumer of goods and services over their lifespan and that as a worker over their working life.

This immediately makes demographics relevant to all individuals in the world – 8.2bn consumers and nearly 5.6bn workers. It, therefore, follows that demographics have an impact on all balance sheets and income statements and on all horizons: the short-term, medium-term and long-term. As consumers’ and workers’ decisions impact macroeconomic variables (GDP growth, inflation, interest rates, capital flows) and asset prices they impact investment decisions; asset allocation and investment strategy.

The popular perspective of demographics being mainly associated with age and having long-term effects only as well as the folklore that “demographics is destiny” is narrow, incorrect, and quite imprecise. Similarly, the view that it has long-term effects only and is predictable is not correct. One can simply say that a person will be 10 years older in 10 years, but it is quite incorrect to posit that they will consume and work like someone 10 years older than them. Individuals are also consumers now, not just in the future and those working are current workers.

The current global macro environment is one of low economic growth, high public debt burden and high inflation, which poses great aggregate (not sector, not country, not asset-specific) uncertainty for policymakers, investors and pensioners, workers as well as students. Aggregate macro uncertainty also contributes to systemic risks. The macroeconomic uncertainty is further accentuated by geopolitical risks that emanate from demographics, as articulated by Professor Sam Huntington in his book “Clash of Civilizations” which pointed towards the underlying causes of the 9/11 attacks in the US. The genesis of a multipolar regional world and the backdrop to the Russian invasion of Ukraine were also anticipated in the same classic book nearly three decades ago and so was a loss of the gloss of the dollar (also referred to as dedollarisation).

In contrast to the 1980s and 1990s, the first two decades of this century have seen much lower economic growth and a lot of it has been driven by EM and mainly China. The prospect of declining Chinese growth (much lower than 8%) was highlighted by us in 2008-09 but not taken that seriously. Lower global growth and lower GDP per capita growth also affect the fortunes of the financial services industry (investment banks, investment managers, insurance companies, pension funds, and investment consultants), a point I have been making since 2004. The confidence, sentiment and motivation of workers and consumers in low-growth periods are not the same as those during the high-growth periods. The behaviour of consumers and workers is affected not only by age but also by gender, race, identity, education, income, wealth etc. Age is not a summary statistic for all the demographics of an individual. Behaviour and psychology were missing elements in the macroeconomists' analysis of conditions, which caused them to miss calling the Global Financial Crisis as admitted by George Akerlof and Robert Shiller in their book “Animal Spirits”. The book highlighted the failures of quantitative macro models and frameworks to predict and forecast impending financial crises.