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The English football season is underway, and here is a prediction: Arsenal will be among the top three at the end of it. I am a lot less confident about predicting anything more specific, such as the score when they face my own club, Fulham, on April Fool’s day.
In the same way, I would not dream of predicting exact share prices from week to week. All that really matters is that I identify those companies capable of delivering relative outperformance over the long term.
Equity investing is a long game. Because of that, I am always looking for secular tailwinds that can give well-run companies with competitive advantages a sustained surge of growth to win in that game.
Demographics can be one of those tailwinds. Over recent decades the growth in emerging market working populations has fuelled a rise in consumption which benefited companies such as Nestlé, Coca-Cola and KFC owner Yum Brands.
Take China. Over the past 50 years the number of people aged 15 to 64 has grown from just over 500mn to nearly a billion — from 56 per cent to 70 per cent of a burgeoning population.
Statisticians and politicians have always tended to extrapolate inexorable growth 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 I downloaded in 2015. Back then it expected the global population to be 11.2bn by 2100. Today, it predicts a billion less than that. Statisticians are having to reverse their extrapolations — in some areas quite dramatically. If population growth is worrying, the alternative seems at least as threatening.
Take fertility rates, which have been low and falling in Japan and Italy for 20 years, but now they seem to be falling everywhere. World Bank numbers show that in 1963 the average world fertility rate peaked at 5.3 children per woman; it is now just under 2.3 — anything under 2.1 results in a declining population.
A major part of the slowdown comes from emerging markets. Indian rates have fallen from six to two over the period. Sub-Saharan Africa is following the same downward trajectory. East Asia has plummeted from 7.5 in 1963 to 1.5, which indicates very substantial population declines.
There is a range of assumptions about fertility levels. Some believe they depend on culture or religion; others think marriage age and adoption of contraception are more influential. Many believe that in the UK — where rates are also on a downward trend — they are principally determined by the 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.
Ultimately, they tend to be higher when people are poorer. They decline with wealth and, in particular, as female 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 retired older people.
To see the implications of this, one only has to visit Japan, which has had a fertility rate below replacement for decades and policies that avoided 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 elderly people but very few children.
As Paul Morland explains in his recent book, No One LeftJapan’s population rose beyond 100mn in the 1960s and will fall back through that level in the 2050s. On the way up it had nine people supporting each retiree; on the way down it will have only one-and-a-half.
In China, the numbers from the World Bank are even bleaker. Look forward 30 years and the proportion of the population who are retired — one in 25 in 1974 — is forecast to have soared to one in three. By 2100 each person working will have to support one retiree.
So what are the implications of these trends for equity investors?
There will be a shrinking pool of new employees over the next 20 years and more. In Japan this cohort has shown little prowess in negotiating pay rises, but this does not seem to be the case in the UK, where I hear stories of City legal firms paying starting salaries in excess of £100,000.
Companies with few staff per dollar of income will be less exposed to wage pressure. And that brings us to technology. Apple, for example, employs only 161,000 people — making the kit is outsourced. Similarly, software company Adobe employs just 30,000 people.
The odd man out in technology is Amazon, as it does all the 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 the UK grocers, have large staff numbers and only modest profit margins, making them very sensitive to wage pressures.
It means there will be substantial economic pressure to embrace automation. Artificial intelligence (AI) will doubtless play a role, not just through ChatGPT and generative AI but through enabling efficiency in other labour-intensive areas, such as government services. Companies such as Accenture, which can support the adoption of AI within organisations, seem likely to see greater demand for their advice for years to come.
An ageing population will fuel demand for healthcare and the need to be more productive in providing that care. The leading companies in health automation include diagnostics company Danaher, patient record management company Cerner, which is now owned by Oracle, scanner maker Siemens Healthineers (dreadful name) and all-rounders such as Philips Healthcare.
I cannot say how any of these companies will fare in the weeks ahead, but they are on my “portfolio contenders” list and worth considering for their long-term potential. I fear I will need the profits to fund my care home costs one day.
Simon Edelsten is a former professional fund manager