NGS Super secular trends: demographic changes

Each year, our Investments team sets the strategic asset allocation for our portfolio. As part of this exercise, we produce an in-depth research piece on upcoming “secular trends”.

What are secular trends and why do they matter?

Secular trends are evolving trends in the market that take place over a longer time horizon, rather than being seasonal or cyclical. It’s important for us to understand secular trends when we’re reviewing and setting our long-term strategic asset allocation, as they help us identify investment opportunities and risks.

Key trends ahead

Our secular trend analysis this year looked at:

1. carbon neutrality
2. electronic and autonomous vehicles
3. 3D printing
4. the metaverse
5. demographic changes
6. quantum computing
7. geopolitics
8. blockchain, decentralised finance and cryptocurrency
9. the hydrogen economy.

This article focuses on demographic changes.

Demographic changes

There are a number of striking demographic changes globally that will have significant effects on economies and markets:¹

• The global population is ageing. The fastest growing age group is people 65 and over, and life expectancy is expected to increase to 77.1 years in 2050 (from 72.6 years in 2019).
• Birth rates are low across the world. The ‘replacement rate’, i.e. the number of births needed to maintain existing population numbers, is 2.3 children, but global fertility is projected to fall from 2.5 children per woman in 2019 to 2.2 in 2050. It’s worth noting that once an economy has reached developed status, working mothers don’t necessarily result in fewer children, especially if there is adequate, affordable childcare .
• However, some regions are experiencing ‘youth bulges’, where the fastest growing age group is people aged 15-24. This provides potential opportunities for growth as the working age population will swell as those young people get older.
• The United Nations (UN) predicts that half of population growth between now and 2050, when the global population is expected to reach 9.8 billion, will come from just 9 countries.
• Although migration rates were slowed by COVID-19 restrictions, international migrants (people living outside their country of birth) now make up almost 3.5% of the global population. For countries with ageing populations, attracting younger migrants can be a way to boost the working-age population.
• Urbanisation continues to increase rapidly, with 60% of the global population expect to live in cities in 2030, compared to 55% in 2018.

Are there risks?

There are certainly challenges. Rapidly ageing populations will mean an increase in demand for healthcare.

As the number of young consumers declines, so will demand for goods and services targeted at that group.

At the same time, the overall level of consumer demand will increase while the supply of workers to meet that demand will decrease. For labour-intensive industries, transition and automation planning will be crucial.

What does this mean for NGS Super’s portfolio?

Changing demographics make it especially important for us to regularly and carefully review the composition of our portfolio (that is, the strategic asset allocation). To benefit from the different demographic stages of different countries, we need to focus on international diversification.

Government bonds of countries with rapidly aging populations and high debt, or fiscal and current account deficits, need to be assessed to ensure that potential returns sufficiently compensate for underlying risk.