Churchouse Letter
December 2015         by Peter Churchouse

A Multi-Decade Mega-Trend Has Begun

It is "Without Parallel in the History of Mankind"

We are at the beginning of a massive, unprecedented shift in global demographics.
The implications for nations, governments and individuals are absolutely profound...
... and there are some once-in-a-generation investment opportunities available to us.

On September 1st 1939 German tanks rolled into Poland along with 1.5 million troops. Simultaneous air and naval attacks accompanied the land invasion. Chancellor Adolf Hitler claimed it to be a “defensive action”.

This attack followed Germany's 1938 annexation of Austria, and the 1939 occupation of Czechoslovakia. Having gotten away with these earlier exploits, Hitler anticipated the international community would treat the Polish invasion with similar indifference.

He was wrong.

Britain declared war on Germany on September 3rd 1939. France followed suit hours later. India, Australia and New Zealand joined in quick succession.

So began World War II. It was the most widespread war in history. It involved more than 100 million people from over 30 countries. It was fought simultaneously in six of seven continents. And it reshaped the entire world.

Countless books on the subject have been written. Academics, political theorists, economists, and historians have all weighed in on how this conflict impacted the lives of those who lived through it and of the generations to follow.

But there is one aspect of this conflict for which the repercussions are only just beginning to be felt. And, 70 years after the war ended, it provides us some appealing investment opportunities.

This is not some short-term cyclical trend or one-off event. This is a fundamental, secular, big picture trend. It is independent of shorter-term economic or business cycles. It is one of four mega-trends that will shape the investing landscape over the coming decade.

Let me explain.

As war erupted, men and women were shipped all over the world to serve their countries. The war was expected to last one year. It lasted six.

The numbers for World War II are scarcely believable.

Some estimates put the number of people who served (militarily and otherwise) in World War II at 190 million. This is out of a global population in 1939 of about 2.35 billion. That’s 8% of the population.

Estimates of deaths during this war are notoriously difficult. A general consensus puts the total at around 70-80 million.

U.S. military personnel totalled 12.4 million people out of a population of 132.2 million.

Countless families were torn apart by death and destruction. Millions were separated for long periods.

A great proportion of those who served were young men and women of prime child bearing age. Birth rates collapsed. The impact of the war on global demographics was profound. (And that’s before you add in the 70-80 million who lost their lives.)

My own father was one of these statistics. He left New Zealand as a teenage soldier at the start of the war. He spent three years in prisoner of war camps in North Africa and Italy before returning home at the end of the war.

He then had to pick up and start a life with little education or money.

Once the war ended and peace reigned, demographic developments returned to normal. Population growth accelerated following the interrupted decade of the 1940s to reach new highs in the 1950s and 1960s.

Many of us are the product of that process. I myself was born in 1949. We are the baby boomers.

But we don’t just have Hitler to thank for the extraordinarily low birth rate of the 1940’s in the U.S.

The birth rate per 1,000 population was already falling off a cliff in the wake of the Great Depression.

This was the decade-long deepest economic downturn ever experienced in the Western industrialised time.

Now the boomers are starting to retire. And they’re doing so in massive numbers.

From 2011 to 2030, 10,000 baby boomers will turn 65 every day in the U.S. alone, according to the Pew Research Centre.

This is a global trend. Across the world we are witness to an unprecedented rise in the proportion of the population entering retirement age.

Long-term US Births per 1000 from 1910 to 2010

Figure 2 shows how the proportion of those aged 65 and over is set to dramatically increase over the next 15 years.

The proportion of total population aged 65 and above is rising across the developed world, and especially in China.

Population over 65 as a percentage of the total for Japan, Europe, the US, China and the World from 2010-2030

It is well documented that Japan is way ahead of the elderly pack. About 27% of total population are aged 65 and above. In Europe it is about 17%, and in the U.S. 15%.

I know these charts may not look particularly scary. But I can’t stress enough just how profound the implications will be for developed economies in particular.

In China the numbers are staggering (see Figure 3).

Population aged 65 and above in millions for Japan, the US, Europe and China

There are currently approximately 132 million people aged 65 and above in China. In the next 15 years that number will increase by 80% to 235 million.

That’s an extra 104 million Chinese over 65 years old in the next 15 years. That’s equivalent to the total current populations of France and Canada combined.

The scale of demographic change that’s taking place in China alone is huge. So much so that we will be dedicating the next edition of The Churchouse Letter to outlining our China investment opportunities separately.

Globally, across high- and middle-income countries, the UN projects nearly a quarter of a billion additional over 65s in the next decade.

The world population is getting older. And fast.

Additionally, people are living substantially longer post-retirement age than ever before.

When I was born, my parents were expected to live another 13 years after they turned 65.

Today, a 65-year-old in a high-income country is expected to live another 19 years.

The world population is getting older. And people are living increasingly longer.

The dependency ratio is also rising. This brings big positives for the kind of investments we believe will benefit from the changing demographics.

The dependency ratio is the proportion of people in the dependent age groups of 0-14 and 65+, compared to the working population age group of 15-64.

From the 1960s to 1990 the total dependency ratio fell for Europe and Japan, and for a bit longer in the U.S.

A low dependency ratio is great for economic growth. It means lots of productive tax-paying workers supporting fewer elderly people.

But the tides are turning fast. Dependency ratios have risen steadily since 1990 (see Figure 4).

“Because Germany’s birth-rate has been falling for decades, those who would now perhaps be thinking about having children were never actually born.”

Jens Weidmann,

President of German Bundesbank
Historical old age dependency ratio for the US, Euro area, Japan and High Income countries.

This creates huge opportunities for investors who follow our lead. So keep reading.

For our investment case here, we are focused on the old-age dependency ratio. This is the number of people in the 65+ age group as a percentage of the working population.

Again, Japan is the stand out nation. For every 100 working age people, there are now 43 people of retirement age. And that number is rising.

For Europe it is about one person in the retirement zone to every four people of working age. The ratio is only a little lower for the U.S. and Australia.

For Germany the ratio is closer to one in three. Perhaps this is partly behind Angela Merkel's willingness to open German doors to migrants.

Global Old Age Dependency Ratio from 1950-2050

Whilst developed countries all reflect different old-age dependency ratios, the trend is the same.

The key points I want to highlight are as follows:

  • The size of the over 65s population is growing rapidly.
  • The number of over 65s in proportion to the rest of the population is growing at an increasing rate.
  • The trend started a few years ago but it’s a multi-decade phenomenon.
  • The over 65s are living longer post-retirement.
  • This global ageing trend is “without parallel in the history of mankind”, according to the U.N.

What are the key investments that will benefit from this unprecedented demographic shift?

Post-war baby boom, Declining birth rates, and living longer contribute to the Old Age population increasing in both numbers and as a percentage of the population.

The Obvious Choice

We’ve spent a lot of time this year looking at defensive plays for our portfolio. And our first pick for the demographic dividend is a sector that has also traditionally been viewed as defensive.

But recent performance would suggest otherwise...

To discover what the obvious choice is to take advantage of this global demographic shift, purchase your subscription to The Churchouse Letter today!


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