Why Demographics Are Core to Understanding Growth and Financial Markets


The 2016 CFA Institute Middle East Investment Conference will take place in Bahrain on 13 April 2016, bringing together international thought leaders, policymakers, industry experts and key market participants from across the region to consider MENA’s Role in the Global Economy.

Amlan Roy

The opportunity to exploit a gigantic demographic dividend was dangled in front of the audience at the 2015 CFA Institute Middle East Investment Conference by Amlan Roy, managing director and head of global demographics and pensions research at Credit Suisse Securities (Europe) Limited. But this enticing opportunity is accompanied by many avoidable threats and risks.

The economist began by quoting Peter Drucker, a leading management guru, who said, “The single most important factor that nobody pays attention to is ‘demographics,’ and when they do pay attention, they miss the point.” Roy noted that demographics do not equal age and age alone. Age is simply one characteristic of a large number of variables and differences in any heterogeneous population.

For example, Roy explained that even groups superficially similar, such as those classified as immigrants, were likely to have spending (and investing) patterns starkly different from each other. Experimental economics and behavioural finance demonstrate diverse patterns of expenditure for different demographic characteristics.

Why has recent macroeconomic policy been ineffective? According to Roy, “The answer is that fiscal policy can’t do anything in a world where 80% of my taxes are going to pensions, health, long-term care, on top of which we have got youth unemployment.” More menacingly, youth unemployment is a potential threat, not just in the Middle East but in Brazil, India, and China, where there is a high degree of inequality.

Misapprehensions abound on demographics in all of these countries: “Please don’t think that just because India has a lot of people that this is a demographic dividend,” Roy said. The demographic dividend is intimately linked to human capital and education. The demographics issue is not about counting people or about population ages. Nor is it predictable. For Roy, it is about understanding the global diversity of consumers and workers.

“Look at the things we connect demographics to: discount rates, economic growth, mortality, organisational structure, pensions, health, inflation, and commodity sectors, ” Roy said. The economist believes that demographics is one of the largest and widest-ranging issues to which investors fail to pay attention and that education, health, labour market, and pension reform are needed.

Macroeconomists and actuaries are mistaken to categorise people into only three age groups. The fastest-growing age group in the world is actually the 80+ age group, growing at many times the rate of everyone else, up by 381% between 1970 and 2015, versus 98% for the overall world population. All countries are making promises to this fast-expanding age group that they cannot keep. The US government spends double the amount on an 80-year-old than it does on a 60-year-old.

Roy highlights that the United States has the lowest life expectancy at birth in the G–15 countries, “despite the fact that Americans spend around $9,000 per capita on health care, around the highest in the world.” Two reasons for this anomaly are high obesity levels and the comparative inefficiency of the US health care system. Nevertheless, the US population is expected to grow, whereas other countries are not growing at replacement rates. Old age dependency is a global problem, and Roy argued governments need to break unsupportable promises to the old or at least cut them back.

On geopolitics, Roy pointed out that Russia used to be 68% of the population size of the United States; today, it is roughly 39%, and it’s expected to go down to 26%, Roy said. Recommending that his audience read The Clash of Civilizations and the Remaking of World Order by Samuel P. Huntington, Roy suggested that investors consider that Russia and China are the only two powers that are growing older before growing richer. Furthermore, the acronym BRIC is dismissed by Roy as highly misleading marketing hype due to the stark differences and prospects of the various component countries.

Turning to the Middle East, Roy pointed to the many differences. Youth dependency ratios are very low in Qatar and Kuwait but high in Iraq, Egypt, Israel, and the United Arab Emirates (UAE). Life expectancy at birth is high in Israel and Qatar but lower in Egypt, Kuwait, and the UAE. Israel and Saudi Arabia have the lowest fertility rates. Rather than putting the Middle East in one bucket, Roy suggested closer differentiation.

On optimal retirement dates, Roy was less definitive, except to say that current retirement ages are far too generous to recipients. But reform needs to be holistic and take into consideration differences by occupational factors and address labour law and health issues. When it comes to saving for retirement, we currently have the wrong product solutions for the wrong people using the wrong models, Roy contended. Saving the necessary investment assets to fund our retirements is fraught with statistical difficulties. Health care costs, inflation rates, taxes, asset returns, long bond yields, and retirement living costs are all unknowns that are difficult to predict.

Next, Roy suggested that greater gender equality and opportunities will lead to greater sustainable growth prospects. Currently, the male/female participation rate gap is 13% in United States, the United Kingdom, and Germany; 11% in France; 48% in Kuwait; and 57% in India. Yet in the G–20, girls do better than boys. This represents a great potential opportunity to boost growth.

Roy posited that if you wish to understand growth, you need to fully interpret the data and understand three factors:

  • working age population,
  • labour productivity, and
  • labour utilisation.

On working age population, for example, old age, sickness, and disability account for 68% of the taxes in Europe, which will inevitably act as a permanent and growing drag on growth. This is something that is highly unfair to the young people whose taxes will have to fund the older segments.

To conclude, Roy’s demographic beliefs lead him to be bullish on the pharmaceutical and biotech sectors. Financial services also have a great future because of the need for new and more effective risk-managed pension products. This will stoke demand for active asset allocation across multiple asset classes, such as the alternative asset classes — infrastructure, real estate, and natural resources. Leisure and luxury are going to be in demand, in tune with growing inequality. A last thought: emerging markets, providing investors read them correctly, are high on Roy’s shopping list.

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