Through the lens of demographics

The rapid growth of the global population over the past century has provided a strong underpin for market growth. In some countries, though, populations are decreasing and there is a rising proportion of older people. These demographic shifts could impact investment performance through weakening demand and higher wage costs. We show how consumer spending varies by age, with product categories having specific age profiles. As the population ages, demand in product categories could shift in line with market changes.

The size of the labour force relative to the total population will reduce in countries with ageing populations. We show that the number of countries with severe labour shortages will increase dramatically after 2040. The scale of labour shortages could drive up labour costs and may also impact the operational capability of businesses.

It is therefore imperative for investors to assess the demographic risks to companies, especially as South African pension funds can now allocate a higher proportion of their assets offshore. We illustrate the application of demographic analysis by way of three case studies.

In the case of Tencent (700-HK), we show that the target market of its Games division in China could drop by 18.1% by 2030, while the market population for its Social Network division could reduce by 3.3%.

Our analysis of British American Tobacco’s (BATS-GB) European division reveals that its target market population could reduce by 12% by 2040. The analysis also underscores the need for more granular, country-level segmentation, and we argue that IFRS segmentation disclosure must be enhanced.

Our third case study considers the Chinese real estate crisis through the lens of demographics. Although China’s population grew from 1.35bn in 2011 to 1.42bn in 2022, the population of those aged 25-44 years (the likely age group of first-time home buyers) dropped by 25.9m. Construction of new homes in China continued at a rapid pace despite these demographic changes. Our analysis reveals that this may have contributed to c. 60m incomplete or abandoned apartment units. With the population in that age group set to decline by a further 35% by 2030, the crisis could be protracted.