Nowadays, the current economic community faces multiple challenges. While the focus is on the unfolding financial crisis and on finding the keys to solving the stagnation in the Eurozone, in China, in Emerging Markets or in the United States economies, the consequences of demographic changes in the world may be challenging for the social and investment climate.
The most significant challenges are the rapid population growth in some of the developing countries, the changes in the proportion of adolescents and young people, the increasing life expectancy for the ageing population, as well as the urbanization and international migration. All of them create intractable problems compromising economic growth, fiscal sustainability, environmental quality, safety and welfare of the people.
According to different independent data, by 2050, more than 90% of the world's population growth will occur in Africa, Asia (ex- Japan), Latin America.
The planning answer to such circumstances would be an achievement of 734 million new working places in year 2030. Also it will be necessary to ensure that these people have a human capital (quality education and health) allowing them to engage in productive work, as well as to create physical capital and infrastructure, which is required to maintain a high employment rate.
The success of the globalization will be to offer to this growing population a good local ecosystem, access to natural resources, to education, to drugs and well equipped medical infrastructures, to treated and clean water, to security, to political and social stability, and to properly remunerated jobs, so that this population doesn't hunt for migrating to developed countries as their only alternative for a better life.
The current high unemployment rate in developing countries, coupled with the difficulties to recover from the 2011 European crisis, is forcing the politics to take the measures to control and stabilize the demographic and social situations. This atmosphere is clearly not offering to this immigrating population the safe heaven environment that they are looking for.
Economists and social experts are still debating on the effects of this important immigration: while some recognize that this population will boost the consumption of goods and services, others alert that the middle-class people will be the one risking losing their jobs, leading to widening the gap between the wealthy and poor population class.
While developed countries bear huge costs for hosting, supporting and adapting all these people, at the same time, the good adaptation of this population may solve the existing problem of an ageing population due to the falling birth's rate.
It has been noted that a large number of migrants (of course not all) do not show willingness to adapt culturally and socially, avoiding participation in productive activities. Thus the labor resources do not enlarge as expected and as needed. Some migrants and their descendants are closed in the diaspora living, spending wages and benefits within their community contributing to an increase in the gray sector of the economy.
It is estimated that in 2015, more than 400 billion USD were legally transferred by migrants to their places of origin. Of course, a good part of this is an irrecoverable loss to the markets of developed countries.
The performance of these efforts is and will remain ambiguous and contradictory.
When it comes to adapting these elements to portfolio management, we do recognize that it is difficult manage and protect portfolios from the "social" risk.
The recent market volatility has been driven by disappointing economic data, poor earnings growth and/or a depressing commodity market leading to an important sell-off of the Sovereign Wealth Funds… and not much by the population's protest rallies.
However, identifying the sectors that could be long term beneficiaries seems easier.
Indeed, it is realistic to expect that the food (including agricultural chemicals), the water (drinkable and industrial), the pharmaceutical, and the infrastructure industries will be benefiting from the growing population needs. This could lead to more financial and CAPEX investments in both developed and emerging markets.
There are also other interesting thematic investments related to the demographic trend, the desire for quality of life and the mobility of consumption of this growing population: this can include industries like health care treatment for the elderly (such as high end clinics and homes) but also for the young population (for example in dentistry), innovative medical devices and technologies, VIP tourism, or real estate development in areas with favorable climate.
Investing in these themes is achievable for most investors, as the large asset management firms have launched a series of thematic equity funds (active funds and ETF's).
Since most of the above themes remain niche investments (hence, volatile investments), it is important to control the risk by allocating only a small weighting in each one.
We can list a number of investible vehicles, such as the BNP Aqua Fund (for the Water's theme), MIV Global Medtech (for the Medical & Healthcare themes), the Julius Baer "Next Generation" Certificate (covering urbanization, energy transition, sustainable food production, tourism needs and digital disruption), the Vontobel Clean Technlogy Fund (for the clean & renewable energies) or the Ishares Global Infrastructure ETF (for the infrastructure theme).
This list does not represent a recommendation, nor a solicitation to invest, but only an illustration of possible investment alternatives. Investors should carefully discuss it with their financial advisor to ensure that their risk profile can fit with these thematic ideas.
This report has been prepared in collaboration with Nikita Devyataykin.
We thank him for his valuable contribution.
Mirko Visco, Chief Investment Officer