The Review — 12/03/2018 at 15:45

What Does Population Aging Mean for Growth and Investments?



Global populations are aging – on this there is little debate. However, what that means for growth, investment and social cohesion has been less often discussed.

Profound demographic and technological changes are transforming the societies where we live and work globally. On the one hand, the large post-World War II generation is retiring and working age populations are shrinking in many countries. This demographic shift alone will likely translate into slower growth, lower interest rates, and subpar financial returns unless nations increase the size of their labor forces and/or improve productivity. At the same time, the Fourth Industrial Revolution is redefining key industries and the meaning of work. While nations can leverage the productivity-enhancing advances of this digital revolution or increase immigration to stimulate growth, both tactics can be controversial and disruptive. Indeed, unless there are reforms to the social contract between governments, employers and employees, immigration, technological innovation and other factors can reinforce social, economic and industrial disorder, fuel populist backlash, and build opposition to pro-growth solutions to these demographic headwinds.

In this paper, we address the economic implications of aging, the levers countries may pull to counteract these challenges and the investment opportunities that arise as a result. In particular, in this global “new normal”, which Henry McVey, KKR’s Head of Global Macro & Asset Allocation and Markets Risk and CIO of the KKR Balance Sheet, has described in prior publications, we believe investors may consider:

1. Seek investment products that offer income or yield in a lower return environment. Henry McVey expects slowing working age population growth, lower rates, and full valuations to lead to lower expected nominal returns in the future. Given this view, he believes that this backdrop will continue to fuel demand for yield-oriented investments such as infrastructure and asset-based lending as well as for certain global private equity investments.

2. Lean in globally to long-term themes consistent with these demographic changes like health and wellness, urban rentership, travel and leisure, digital content and media, productivity enhancing technology and the search for income yielding financial products. The aging of the population, rise of millennials and the sharing economy driven by an increasingly mobile youth cohort support these trends.

3. Monitor and heed political attitudes and geopolitical risks, particularly focused on possible reactions to high levels of social, economic and technological disruption, high inequality and economic stagnation. Public distrust in key business and political institutions is high. The Fourth Industrial Revolution, radical transparency of the Internet and social media, combined with high inequality and rising immigration are producing political volatility and populism in many nations. Investors must pay attention to these factors as they may impact how well nations can develop policies to counteract the demographic economic headwind.
In the first section of this paper, we delve further into the impact of demographic shifts on the economy and investments. In particular, we look at aging and its impact on growth, consumption, urbanization and consumer preferences. Following this global review, we consider steps nations have and may continue to take to counteract these demographic headwinds, including leveraging technological innovation and immigration to build larger and more productive workforces. We then delve deeper into demographic trends in six countries— Mexico, China, U.S., U.K., Germany and Japan.

The Impact of Aging on Economic Growth and Investing

Per the United Nations, population aging – the increasing share of older individuals in the population – is one of the most significant social transformations of the twenty-first century. At a high level, we expect global population aging to result in slower economic growth, lower financial returns, lower interest rates, increased urbanization as well as shifts in consumption and housing patterns. Each of these will have important investment implications.

The median age of the population will rise in many countries globally as fertility rates – the average number of children born per woman, decline – while longevity increases, just as the massive generation born after World War II retires. Between 2015 and 2030, the global population aged 65 and older is projected to grow by more than 60% (Exhibit 1) compared to working age population growth of 14%. By 2020, for the first time in human history, people aged 65 and over will outnumber children under age five (Exhibit 2).


The Global Population Continues to Grow Older…


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