Many institutional investors have not traditionally been organized to implement investment ideas that are broad, thematic and straddle traditional asset classes. Those that have factored in longevity have largely done so focused on the implications for liabilities and longevity risk in their portfolios. But the megatrend of global aging is only accelerating, and investors will find it worthwhile to focus and capitalize on the long-term opportunities arising from this unprecedented demographic transition. Demography might not be destiny — but it will certainly change the fabric of the global economy in ways that we cannot ignore.
The twin forces of an aging population and increasing life spans will reshape the world economy. Decades-long declines in fertility and improvements in health have brought us to a demographic watershed: by 2018, for the first time in history, those over 65 will outnumber children younger than 5. This demographic transition will have profound consequences for individuals, businesses, governments and investors.
Contrary to popular belief, two-thirds of the world's elderly live in the developing world, and that share is growing. The U.N. projects that the number of Chinese over the age of 65 will exceed the entire current U.S. population by 2045. Even more striking is the unprecedented pace of aging in developing economies. It took France more than a century and the U.S. nearly 70 years for the proportion of those age 65 and older to double to 14% from 7% of the population. In contrast, China, Thailand and Korea are forecast to double their proportion of elderly in just 23, 20 and 18 years respectively.
If the last century of experience is any guide, people will live significantly longer than currently anticipated by demographers. An American born in 1940 was expected to live on average till 63; current life expectancy for that 1940 cohort is now known to be well over 75. Our proprietary actuarial analysis indicates there is a high probability that breakthrough medical discoveries, especially anti-aging genetic therapies, could lead to additional longevity gains beyond what demographers now forecast, especially for younger individuals.
Despite the currently fashionable focus on millennials, real economic power is increasingly wielded by the elderly, who control the majority of investible assets and spending in most major developed markets. Older households are growing in number and outspending their younger counterparts, and they are putting their spending power to work in systematically different sectors of the economy. Decisions both major — attending school, rearing children, funding medical expenses — and minor — joining the gym, eating out, or choosing vacation packages — vary significantly with age.
Collectively, these demographic forces will reshape consumer spending for decades to come and have a material impact on the rise and fall of different sectors of the economy. In the U.S. alone anticipate real annual spending by 2070 to be $325 billion higher for nursing homes, $90 billion higher for home health care and $15 billion higher for financial services than it is today, due solely to the demographic tailwind created by a larger older population. Conversely certain sectors such as education, the restaurant industry and recreational services might see significant headwinds from the aging population.
Many factors ultimately will impact the shifting composition of consumption and production in an aging society, including changes in behaviors, new technologies and public policy decisions. Nevertheless, patient, long-term investors have the opportunity to generate sustained alpha by investing behind the aging megatrend.
Biotech is probably the most obvious example, as venture capital firms invest in operating companies targeting diseases such as cancer, Alzheimer's and Parkinson's. But beyond that, in the real estate sector alone, the opportunities range from independent living facilities, assisted living, customized laboratories for biotech companies clustered around major universities, and condos targeting U.S. baby boomers rediscovering the appeal of the urban lifestyle in towns such as Atlanta, Nashville and Austin, Texas. And many see the next wave of opportunity in “silvertech” — a new wave of startups that are developing platforms, apps and devices aimed at helping older adults live independently, better cope with dementia and other illnesses, and maintain family, caregiver and social connections.
For institutional investors, global aging has a silver lining.
David A. Hunt is chairman, president and CEO, and Taimur Hyat is chief strategy officer of PGIM Inc., Newark, N.J.