By James D. McDonald
Demographic trends are useful when assessing potential for growth and investment returns.
Currently, global population stands at approximately 6.8 billion people. It is expected to rise to more than 9 billion people by 2050. As such, investors might assume that population growth equals economic growth, which equals positive stock market returns. Unfortunately, it isnâ€™t that straightforward. To uncover the true opportunities, one has to dive into the demographic data.
At its core, growth in a countryâ€™s gross domestic product (GDP) is a function of growth in the working-age population and productivity. Given this point, certain trends appear likely to dominate the global economy during the next several decades, as demographic trends are fairly predictable.
By 2050, an increasing proportion of the world population â€” as much as 89% â€” will be living in developing countries. Productivity gains of developing countries also are expected to outpace developed countries, primarily the result of the greater increases anticipated in education, communication, and savings and investment rates. But before committing investments to countries with growing populations, examine where that growth is occurring. Is it in urban centers, or in rural communities? As workers move from low productivity agriculture jobs to urban centers, productivity rates for the economy as a whole should tend to rise. Of the major global economies, India has the longest runway for growth over the next several decades through urbanization. This does not mean developed economies are in decline, however. On the contrary, solid investment opportunities may be found if one seeks out the exporters to these developing markets.
Strong economic growth â€” unaccompanied by sound fiscal policies â€” can lead to poor stock market returns as investors discount the eventual correction of fiscal policies and the resulting economic effects. So the connection between growth in GDP and above-average equity market returns is not definitive. However, the link between weak economic growth and sub-par investment returns appears to be much stronger. Research by the World Bank has found that countries showing below-average GDP growth saw their stock markets underperformed 60% of the time. This suggests underweighting the slow growers.
From the combined impact of these and other trends, one can draw several broad conclusions regarding portfolio construction:
Demographic analysis, combined with an assessment of fiscal policy and politics, can help investors assess potential economic growth and shape investment decisions. As such, the more attractive outlook for emerging markets means investors might want to have good direct and indirect exposure to this growth dynamic. Within developed economies, investors might want to focus on companies with a strong emphasis on exports. We believe portfolios positioned this way would better reflect the increasing globalization of the world economy.