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Stocks and markets fluctuate constantly, but demographic fund managers think decades ahead. Christian Schneider, portfolio manager of global equities at Allianz Global Investors in Frankfurt, talks about the economic force of demographics.
 | Christian Schneider, Global Equities Manager at Allianz Global Investors"We concentrate on countries with high GDP growth rates, but there are ways to benefit from aging societies." |
What is the idea behind investments in demographic trends?
When it comes to investments, we are focusing mainly on age-related dynamics. The question is, what impact will changing population trends have on economies and certain industries? These age-related trends – basically an aging population in western Europe, the U.S., Japan, and very young populations in many Asian countries, South America, and some African countries – may have a significant impact on economic growth. We want to take advantage of long-term growth themes and avoid the losers of demographic change.
 | Total Elderly Population (click to enlarge)This map shows how the world would look like if the number of elderly people (over 65 years) in one country would determine its geographic size. China has the largest elderly population (92 million). Italy has the highest percentage of elderly (19 %), the United Arab Emirates the lowest (1 %) |
Who will be the losers?
Well, if you think of Germany’s population, for example, you will see that the biggest age bracket is in between their 40s and 60s, and they will go into retirement in the next 20 or 30 years. All younger brackets are smaller. So Germany is shrinking. That means that fewer people are starting families. In this case, you will have a decline in housing, because there are fewer couples. So we would avoid banks that provide mortgage in Germany and most of western Europe. Retail banking, too, will be in decline over the next 20 or 30 years.
On the other hand, look at banking in a place like Brazil: about 70 percent of the workforce is not yet receiving their paycheck into a bank account; they get it in cash. And this is a population that is quite young. The pool of workers is growing. Plus it is a developing market with a growing middle class, so there will be a lot of demand for banking products. Here, investing in banking makes sense.
What about a country like China where the banking sector is growing rapidly, but in 30 or 40 years, the country will face huge problems because of its aging society.
It won’t even take that long. The problems in China will start throughout the next decade. The one-child policy has been in place since the 1970s, and these kids are now getting into their 30s and having kids on their own, but again, just one kid. So the population will decline quite quickly, actually. Still, for the next 6 to 8 years, China will be okay. Until 2012 or 2014, the workforce population will still be growing.
But even beyond this date, China may do quite well, because there you have two factors working against each other. You have an aging population, but you still have a huge rural population which is not yet tied into the global economy. So China might be able to avoid demographic pressures a bit longer as it tries to integrate these people into its workforce in urban, metropolitan areas.
You profit from population growth. Does it mean you do not invest at all in aging societies?
We concentrate on countries with high GDP growth rates, but there are certainly ways to benefit from aging societies. First of all, there will be a need for new consumer products, and aging societies are usually quite affluent. Health care is definitely an issue. There is a structural rise in certain age-related illnesses, like glaucoma. If you do not treat this, you go blind. What we are working against, unfortunately, is that this will put the health care systems under stress, because the demand for payment will rise.
A very important issue in aging societies will also be savings for retirement. If more people retire and less work, Germany’s pay-as-you-go financing system will not be sustainable. The people who retire in 30 years can’t expect to get what retirees get today. So there will be a desperate need to save for retirement in order to maintain a certain lifestyle.
If you are mainly focused on growing populations, you will have to invest in emerging markets. Doesn’t that involve higher risks?
Certainly you have risks in that market: you have different accounting standards, different legal rules. But these markets will develop over time. I think our perception of these countries has to change. In particular, the superior growth rates of these countries are important. Ignore economic cycles for a moment. There will always be economic cycles with higher growth and lower growth. The sustainable growth in these areas will, given the demographics, be higher, and the way to benefit from that is to invest longer term in these countries.
What other demographic trends do you see that might be important for business?
One thing that will be really important for rising societies like China and India will be investment in infrastructure. These countries need to bring their populations into the world economy to stay competitive over the next 20 to 30 years. These people want to have adequate shelter, fresh water, wastewater facilities, road and rail transportation, telephones, food, etc. India will move in the same direction, as will Indonesia, Brazil, and Turkey. There is still a lot of work to do.
editor: Thilo Kunzemann
publishing date: October 29, 2007
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