Populations are declining – how can investors make the most of it?

The football season is underway and here’s a prediction: Arsenal will be in the top three at the end of it. I’m much less confident about predicting something more specific, such as the score when they face my own club, Fulham, on April Fool’s Day.

Likewise, I wouldn’t dream of predicting exact stock prices from one week to the next. All that really matters is that I identify those companies capable of delivering relative long-term performance.

Investing in stocks is a long game. That’s why I’m always on the lookout for secular headwinds that can give well-run companies with competitive advantages sustained growth to win that game.

Demographics can be one of those tailwinds. In recent decades, rising working populations in emerging markets have fueled consumption growth that has benefited companies such as Nestlé, Coca-Cola and KFC owner Yum Brands.

Fertility rates have been low and falling in Japan and Italy for 20 years, but now appear to be falling everywhere

Take China. Over the past 50 years, the number of people aged 15 to 64 has grown from just over 500 million to almost a billion – from 56% to 70% of a growing population.

Statisticians and politicians have always tended to extrapolate the inexorable increase in population numbers and then panic. So you had Thomas “we’re all going to starve” Malthus in 1798, the racist “Yellow Peril” metaphor a century later, and perhaps to some extent concerns about climate change and the impact of population growth on the environment today.

I recently found a spreadsheet of UN population projections that I downloaded in 2015. Back then the global population was expected to be 11.2 billion by 2100. Today, it predicts a billion less than that. Statisticians have to reverse their extrapolations – in some areas quite dramatically. If population growth is a concern, the alternative seems at least as threatening.

Take fertility rates, which have been low and declining in Japan and Italy for 20 years, but now seem to be falling everywhere. World Bank figures show that in 1963 the average global fertility rate peaked at 5.3 children per woman; now it’s just under 2.3 – anything below 2.1 leads to a declining population.

Much of the slowdown comes from emerging markets. Indian rates fell from six to two during this period. Sub-Saharan Africa follows the same downward trajectory. East Asia dropped from 7.5 in 1963 to 1.5, indicating very substantial population declines.

There are a number of assumptions about fertility levels. Some think they depend on culture or religion; others believe that the age of marriage and the adoption of contraception are more influential. Many believe that in the UK – where rates are also on a downward trend – they are mainly driven by affordability of housing and childcare. But fertility rates are lower in Germany and Italy, despite house prices and childcare being cheaper than in the UK.

Finally, they tend to be higher when people are poorer. They decrease with wealth and especially as women’s education and work opportunities improve. The result is that without immigration, populations will age and shrink. Fewer working-age taxpayers will have to support more elderly retirees.

To see the implications of this, you only have to visit Japan, which has had a below-replacement fertility rate for decades and policies that shunned immigration. A few years ago I was in Takayama, a beautifully preserved old town in Japan’s mountainous Gifu Prefecture. It soon became clear that it was built for a population about a quarter larger. There were many charming old men, but very few children.

As Paul Morland explains in his recent book, No one is leftJapan’s population grew by more than 100 million in the 1960s and will fall back above that level in the 2050s. On the way up, it had nine people supporting every retiree; on descent it will only be one and a half.

In China, the figures from the World Bank are even bleaker. Fast forward 30 years, and the proportion of the population that is retired – one in 25 in 1974 – is estimated to have risen to one in three. By 2100 every working person will have to support a pensioner.

So what are the implications of these trends for equity investors?

There will be a decline in new hires for the next 20 years and more. In Japan, this cohort has shown little skill in negotiating pay rises, but this does not seem to be the case in the UK, where I hear stories of City law firms paying starting salaries of over £100,000.

Companies with fewer staff per dollar of revenue will be less exposed to wage pressure. And that brings us to technology. Apple, for example, only has 161,000 employees – kit making is outsourced. Similarly, software company Adobe has only 30,000 employees.

An aging population will fuel the demand for healthcare and the need to be more productive in providing that care

The odd man out in tech is Amazon, as is all of delivery itself. It employs more than 1.5 million people worldwide – up there with the NHS and the People’s Liberation Army of China. Other retailers, such as those in the UK, have large staff numbers and only modest profit margins, making them highly susceptible to wage pressures.

It means there will be substantial economic pressure to adopt automation. Artificial intelligence (AI) will undoubtedly play a role, not just through ChatGPT and generative AI, but also in bringing efficiency to other labor-intensive areas such as government services. Companies such as Accenture, which can support the adoption of AI within organizations, look likely to see greater demand for their advice in the coming years.

An aging population will fuel the demand for healthcare and the need to be more productive in providing that care. Companies leading the way in health automation include diagnostics company Danaher, patient records management company Cerner, which is now owned by Oracle, scanner maker Siemens Healthineers (terrible name), and MFPs like Philips Healthcare.

I can’t say how any of these companies will do in the coming weeks, but they are on my “portfolio contenders” list and are worth considering for their long-term potential. I’m afraid I’ll need the profits to fund my care home costs one day.

Simon Edelsten is a former professional fund manager