Spain is expected to become the world’s second oldest country by 2050, behind Japan. In the rest of Europe, meanwhile, the ageing population trend also continues. What does this mean for investors?
The ageing population is a global phenomenon, but in Spain it is especially acute. The elderly are expected to increase to a third of the total population in the country by 2050, according to existing projections.
As the number of births declines and longevity rises in developed countries, especially in Europe and Japan, there is increasing investor interest in the ageing theme, particularly for longterm institutional investors who see opportunity in the ongoing demographic shift.
“The ageing population must be considered as a global issue, with greater impact in developed countries, thus offering a wide range of opportunities,” says Celia Benedé, head of Fund Selection at Caja Ingenieros Gestión.
She adds that from an investor point of view the theme is favourable as it constitutes a noncyclical opportunity over the long term.
Benedé explains that some of the investments of the Barcelona-based asset manager are chosen off the back of future expectations for sectors that are influenced positively by the ageing population.
“Sectors with presence in our portfolios include the health and biotechnology sectors, which will undoubtedly benefit from the demographic trend of ageing and increased life expectancy,” she says.
Benedé explains that within investment funds, her team monitors the idea of the ‘Silver Age’ – consumers that are retired but still active and with strong purchasing power.
“The new cycle of life increases the period in which consumers can enjoy a high-quality standard of living, an effect that offers opportunities for certain sectors such as health, leisure, personal care or automotive,” Benedé says.
Caja Ingenieros Gestión invests in Kimberly-Clark, a company for which the personal care segment makes up 50% total sales. The segment has enjoyed double-digit growth annually in each of the past five years in the US and emerging markets.
The asset manager also invests in Stryker, in which 42% of sales come from prosthetics, a division that has grown at an annualised rate of 3% in the past 5 years.
As the ageing investment theme constitutes a permanent long-term trend, Vafa Ahmadi, head of Global Thematic Equities at CPR AM, says he has noticed “a growing expression of interest” from investors over the past three to four years, during which the Silver Age economy took hold as a universal concept.
“Evidence for that is the drastic increase in our assets under management relative to the ageing strategy, which have reached €1.6bn as of January 2017 since inception in 2009,” Ahmadi notes.
Bruno Patain, head of Sales Iberia at Generali Investments, also says the issue of demographics in Europe is becoming increasingly relevant for investors.
”For our Generali Investments Sicav SRI Ageing Population, which we launched in October 2015, this has meant a significant increase in the interest and inflows from institutional clients such as insurance companies and pension funds, whose long-term investment horizon is fully in line with both the fund philosophy and its SRI approach. Plus, it has been recently approved by some big private banks at a continental level,” Patain says.
Generali Investments’ fund is invested in select Spanish companies seen as well positioned in relation to this demographic trend, fund managers Olivier Cassé and Giulia Culot explain.
As greater life expectancy means that people will spend more time than ever in history in retirement – Spanish women are projected to spend 23.7 years in retirement and men 20.4 years – there will be an increase in time allocated to leisure, with holidays as one of the top priorities for retiring baby-boomers.
“Hotel and resort companies, particularly those with a presence in Spanish speaking countries, are expected to benefit from it,” Cassé and Culot say.
The managers also point out that, according to the United Nations World Population Prospects, from 2015 to 2050 people aged 80+ will increase in number by 128%, which will favour those nursing and retirement home companies that hold leading positions in the European market and have a sound presence in the Iberian region.
Caja Ingenieros Gestión sees value in assisted living real estate too and, through its funds, it invests in companies such as US-based healthcare Reits Welltower and Ventas, or Australia’s Stockland, which invests in residential communities and retirement living villages.
An ageing population not only means investment opportunities in funds or stocks linked with the trend, it is also changing the behaviour of Spanish retail investors – particularly when it comes to generating income for their retirement.
According to Eurostat population projections, the share of the working age population in Spain will fall to 53.4% by 2050 from the current 66.9% – a declining trend that means Spanish government tax revenues and social security contributions will decrease.
“The extension of life expectancy, combined with the gradual weakening of state pension plans, is encouraging people to make provisions through savings,” CPR AM’s Ahmadi says.
“The impact on financial markets is clearly positive, as this is where these savings are invested,” he adds.
People are starting to build up their savings ever earlier in anticipation of retirement demands, although it is not clear which products may benefit most from the conversion of savings into financial investments.
Higher savings, initially, are likely to favour riskier assets such as equities, since savings accumulation and investment is a growth driver for this asset class, Ahmadi explains.
César Ozaeta, fixed income fund analyst at Spain’s Abante, also thinks equities could be favoured.
“The investor is going to be forced to invest in equity assets to be able to fulfill their objectives. We are in an environment of low rates that will likely last a long time; in order to obtain interesting returns investors will need to take risks,” Ozaeta says.
The appetite for riskier investments will go through a slow process, he explains, but investors will have to get used to gradually increasing their exposure to equities. The trend has been already seen in pension plans and among insurers, which have started to increase their exposure to equities in order to meet liabilities.
In theory, an ageing population should favour demand for fixed income assets – including public debt – off the back of a larger number of conservative investors.
But the demographic shift could act as a double-edged sword: an ageing population can lead to increased public expenditure, and if Spain’s public debt burden swells investors will query exposure to Spanish bonds.
This, therefore, could push up Spanish bond yields to levels which make it very expensive for the government to fund its debts.
According to S&P Global estimates, total age-related public expenditure in Spain without further policy measures would rise to 22% of GDP in 2050 from 20.8% in 2015, and net government debt would rise to 157% of GDP.
However, the research also points out that lack of further reforms is not a base case scenario.
“It is unlikely that governments would, as a general matter, allow debt and deficit burdens to spiral out of control or that creditors would be willing to subscribe to such high levels of debt.
“As such, we believe that the Spanish authorities will likely introduce further measures to contain the future budgetary impact of the population’s ageing.”