Anthropology and asset allocation: why demographic trends matter

According to Alan Siow, co-head of emerging market corporate debt at NinetyOne, demographic change is a "salient consideration for all investors".

He explains: "Population and demographics form the bedrock of any economy. Understanding the current characteristics and how they will develop and change is key to underwriting sound investments."

But how does demographic change relate to individuals' decisions about their finance?

Ben Kumar, head of equity strategy for Seven Investment Management, states: “Economics is a social science” but must be understood to the fullest.

He says: “Gravity has been around since the big bang – economics only showed up when humans arrived. 

“If the fundamental units of physics are atoms, the fundamental units of economics are people. And that feeds through into investing. To make investment decisions, understanding society is everything.”

Breaking the demographic mega-trend into four pillars - childbirth, longevity, migration/population booms and gender - helps see how it influences financial decisions.

Childbirth

Birthrates are falling, despite the enforced familiarity of Covid-19 lockdowns causing UK live births to pop from 613,936 in January 2020 to more than 624,800 in January 2021, according to the Office for National Statistics. It wasn't enough of a bump.

Globally, the historic average until the 1990s was five children per woman. Now the average is moving downhill.

Data sourced from The Lancet, the ONS, the UN and the World Health Organisation reveal the stark reality (see box-out, below).

Debbie King, co-manager of the Aegon Diversified Monthly Income Fund, says we need to think of the children, because these are the future workforce, those who will shore up state benefits and those who will shape the world to come.

She says: "When we think of changing demographics, what springs to mind is that of shrinking yet ageing populations, as the proportion composed of children falls due to low fertility rates, and the proportion composed of the elderly rises."

In a few short decades, many things such as technologies, consumer preferences, ways of working, and (economic) power dynamics will look very different.

Jens Peers, Mirova US

Children who are born now - Generation Alpha - will eventually lead a world that is vastly different to today's. This should shape our long-term investment thinking, according to Jens Peers, chief investment officer for Mirova US. 

Peers explains: "Megatrends have a wide geographic impact, happen slowly – regardless of economic cycles – and are transformative in terms of how our economies and societies are organised and run.

"Things such as technologies, consumer preferences, ways of working, and (economic) power dynamics will look very different." 

This also means thinking more proactively about how to serve and advise this new generation of investors.

Longevity

The other side of this coin is age. The average global life expectancy from birth is now 73.16 years, according to the UN Population Fund, up from 66.8 in 2000. 

This presents challenges for governments and individuals in funding longer retirements, as working age populations decline.

On the downside, Peers comments: “Countries with an ageing population and an underfunded health and pension system may see their credit ratings deteriorate, leading to higher financing costs for them and a lower return for those investors financing them.”