The ageing of the world’s population is an underlying trend that will long affect global demographics. A falling infant-mortality rate, a drop in fertility and a rise in life expectancy are the main drivers behind this phenomenon. To meet the needs of an ageing population, a large-scale economic ecosystem has been developing called the silver economy and with its formation, a plethora of related investment opportunities have started to appear alongside it.
When the Silver Age strategy was drawn up back in 2009, CPR wanted to tackle the issue of ageing to make the most of the theme in all sectors concerned. Given individuals’ purchasing power in developed countries reaches its highest level when those individuals reach retirement, we built up our universe through the acute prism of the consumer trends of seniors. After all, the demands of freshly retired people who are still active and enjoy a relatively high level of purchasing power are not the same as those who are older and looking more for safety, comfort and calm.
To put things in perspective, the US Silver economy – economic activity serving the needs of Americans over 50, is worth £7 trillion, making it the third largest economy in the world after the US and China, and larger than Britain, Japan, and India. In the last 18 years, companies whose business is related to the ageing population have achieved average revenue and earnings growth that has outperformed the global market. This trend is expected to gather strength.
Our prism is broken down into eight sectors: well-being and leisure; the automotive business; financial savings; safety; health facilities and services; medicines; and dependence to reflect all the aspects of one’s life post 50. We then apply a management process which combines top down and bottom-up approaches and dynamic geographical and sectoral allocation which enables us to adapt the portfolio to market cycles and underlying sectoral changes.
What we realised through the process was that while most industries are underlying seismic shifts, this has become particularly pronounced within industries are particularly pronounced within pharmaceutical companies. Labs are facing considerable pressure in volume and pricing of medicines.
Furthermore, with many terms of patents coming to an end, especially between 2018 and 2022, the insufficient number of new medicines developed internally and the growing supply of generic products and biosimilars will significantly weigh down upon sales figures. At the same time, government policies with restrictive budgets, combined with the emergence of new private insurers and more powerful players, should continue to put pressure on prices. A great example of this is the newly established partnership between Amazon, JP Morgan and Berkshire which has palpably reshaped the playing field.
Such a context is conducive to mergers and acquisitions. With solid balance sheets and good generation of free cash flow, these large groups can strengthen their pipelines of new products (for instance, by acquiring small biotech firms) or improve their cost structuring (by merging with direct rivals). Recent examples include Celgene’s purchase of Juno Therapeutics in January (for $9bn) and Sanofi ’s acquisition of Bioverativ in March ($11.6bn dollars).
We see promise in small and medium stocks which benefit from high potential for development in new indications or geographical regions. Given the level of activity within mergers and acquisitions, we prefer targets to predators.
Bearing in mind all the macro factors influencing the market, for this year we have adjusted our positions to reflect our belief in core sectors and to reduce exposure in sectors we think will falter. First, we are reducing our positions in healthcare products, safety and major pharma stocks due to a lack of attractiveness in growth and valuation prospects. Next, we continue to maintain a high level of exposure to stocks in finance, leisure and the automotive business, which are sensitive to the worldwide trend and enjoying the interstate rise.
For example, cruise operators are still enjoying global growth and a strong demand, especially in developed countries. Carnival Corporation, a world leader in this market (ten brands throughout the world, including Costa), is at the heart of our portfolio. Finally, we continue to hold a high, but well diversified, level of exposure in medical devices and biotechnology, fields in which we will be looking for innovative and disruptive firms with unique growth opportunities.
In the coming 50 years, more and more sectors will be driven by the spending of seniors. As such, there is no doubt that ageing is one of the strongest underlying mega-trends in the developed and developing worlds which investors can tap into to capitalise on the leading demographic phenomenon of our lifetime.
Jean-Dominique Seta is portfolio manager at CPR Asset Management.