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The Changing Face Of Demographic Investing

Dec. 18, 2015

Dec. 18, 2015

People are living longer than ever, and this is changing the way that people are approaching their retirement. Having enough money to be comfortable is a common worry, none more than for the so-called “baby boomers” who are set to retire within the next decade.

Clearly, taking account of changing demographics and the effects on financial markets involves considering more than just age, and this is the main view propagated by Dr. Amlan Roy of Credit Suisse’s Global Demographics & Pensions Research team over more than a decade. While investors have been increasingly mindful of how financial markets have been driven by major demographic changes in the long-term, product issuers have often focused on demographics as age groups more than anything else. Indeed, an ageing population will have a knock-on effect on the pharmaceutical and leisure industries, as well as on healthcare, education and social security, and this will impact financial markets. But markets are also affected by peoples’ characteristics, including gender, religion, level of education, and how many children they have. These factors feed into consumer and worker behaviour, and with consumption being the largest component of GDP, consumer changes are very important to monitor for both investors and policy makers according Credit Suisse’s Global Demographics team.  Consumers and workers affect balance sheets and income statements of every company and every nation. Amlan Roy says that, “demographics transcends narrow views of people-count and age only.”

For some time, recognition has been growing that demographic changes should be considered when designing investment products. Until now, too much of the focus has been on shifting priorities and needs of new and ageing generations, and not enough on the other factors that influence how people spend money; disposable income being one of them.

“People wrongly think demographics is only about age; (but) demographics affects those who are very old as well as those who are young,” says Roy, continuing, “we need to understand how consumers consume, how they invest and how they work to create products for multiple generations.” Many countries in the developed world have an ageing population and the obvious sector to invest in to benefit from this has been healthcare. In general, older people spend more on healthcare and pharmaceuticals than younger people, so in the longer term, health spending will go up.

But older people also require different infrastructure and financial products than younger people, so companies in these sectors can also benefit from an ageing population. Indeed, two people of the same age can exhibit very different behaviors; a retiree with a higher disposable income is more likely to spend money on luxury goods, media and technology for example. As Roy points out by way of example, “An 85-year-old retired miner is very different to an 85-year-old retired consultant. This is the kind of thing people have not paid enough attention to in the past. Now they are starting to.”

Indexing demography

Having worked in Credit Suisse’s demographics team for almost 15 years, Roy is something of a pioneer in the field. Roy identifies six areas set to prosper from changing demographics: pharmaceuticals and healthcare, financial services, leisure and luxury; infrastructure, natural resources and emerging markets.  STOXX welcomed his expertise when devising its new demography index, which has now been licensed to Credit Suisse.

The iSTOXX® Europe Demography 50 Index is derived from the STOXX® Europe 600 Index, screening stocks to select those from sectors set to benefit from demographic changes. Like with actively managed demography funds, healthcare and insurance companies feature prominently in the index, but allocations to utilities, industrials and real estate are also significant. Utilities are currently the second-highest weighted super-sector at 22%.

Demographic changes are inherently very long term by nature, so it can be hard for investors to make the right assessments for future. But it is possible to make short-term gains, through a structured product, as long as investors are willing to consider a range of people characteristics; not just age.

Although the index is optimized for use as the basis of structured products, with further screens for high dividends and low volatility, there is also demand from asset owners and managers looking for other ways to diversify and gain exposure to the theme. A member of Credit Suisse’s structured sales teams notes that, “everyone sees that demography is the theme to go for, and now STOXX is also looking at a dedicated solution for asset owners who are looking to invest in the theme using products such as ETFs.”

The future is bright for demographic investors. Investors looking to profit from demographic changes need to consider more than just age. Indeed, we anticipate that a wider range of sectors, such as media and technology, will benefit from the ageing population of the world.

Moreover, investors wishing to invest in companies that will benefit from this theme are likely to have a greater choice of products with which to do so in the future. The iSTOXX® Europe Demography 50 Index is just one way to harness this potential.

 

 

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