The link between demographic changes and economic development has been statistically proven over the past fifty years, suggesting it is a good starting point for trying to identify areas of faster growth and better investment return in future, according to Hans Rosling, professor of International Health at Sweden’s Karolinska Institute, and co-founder of Gapminder.
The non-profit venture has developed Trendalyzer software, which makes it easier to view statistical time series, particularly relevant to development statistics – including population and wealth changes over time.
Speaking at Skagen Fund’s New Year’s conference in London this week, Rosling laid out evidence that suggested most countries’ populations are converging on a relatively standard life expectancy and repeated patterns of development that take them from frontier to emerging and on to developed market status.
Using Trendalyzer, he showed how, for example, South Korea had progressed from its development status in the 1960s and early 1970s to become the developed market that it is today.
The powerhouses of Brazil, Russia, India and China likewise have been undergoing a similar change.
However, for truly long term investors, looking ahead to the middle of this century, the biggest opportunities may lie in states that currently are seen as un-investable, such as Somalia and Congo.
Other African markets are much further advanced, but generally the continent is misunderstood in terms of its development potential, Rosling said. The key to understanding the pending changes in opportunity lie in tracking demographic changes, he said.
The pattern is repeated time and again: fertility rates fall, life expectancy rises, and this increases the proportion of the working age population relative to the very young and very old, which spurs an economy on. The final stage of demographic development can be seen in a market such as Japan, where the number of children born is so low and the ageing of the population such that sales of nappies for the old outstrip sales of nappies for babies. Rosling put this change down to the fact women in Japan are having babies later in life, and that the country is still resistant to immigration.
Africa’s population meanwhile is set to double, and the proportion of this population of working age set to increase rapidly in coming decades. Meanwhile the size of family units is converging on what is becoming the statistical norm. Much of this is down to improved education of women, Rosling suggested, as well as what he calls “pillow talk” that tends to produce the same outcomes regardless of location, socioeconomic grouping or culture.
There are certainly variations within the averages, even within individual countries themselves, such as between rich and poor, but the broader statistical changes seen in populations hold true over time he argued.
This in turn means demographics can provide a stable base on which to base analysis for identifying future investment opportunities. If investors know that in the long run, certain markets in Africa will develop in a way that has been repeated many times over elsewhere, then investors can make a better judgement about whether asset prices currently are worth the risk, measured against particular time horizons.
There will be short-term hiccups – Rosling mentions the civil war in Syria as an example – which can affect investment return from individual markets or even entire regions.
But the economic power of the world is moving inexorably East and South, with Rosling identifying the G20 meeting in late 2008 as the tipping point, when US president George Bush secured some $30bn in funding from Brazil alone through promises by then Brazilian president Luiz Inácio Lula da Silva to buy US Treasuries.
For long term investors it is therefor a “no-brainer” to seek out investments in emerging and frontier markets, particularly in Africa and Asia, rather than in the already developed markets of US and Europe, which in decades hence will represent only about 10% of the world’s population.
For further information about Gapminder and its data click here: http://www.gapminder.org/downloads/