Zafran: Betting on the Population Boom
One of the key themes being discussed and debated at this year’s Aspen Ideas Festival is: “How will we live in a world with exploding population growth?” There are a variety investment opportunities to be had in connection with this.
In a time of financial crisis and “risk off” mentality, it’s easy to overlook some compelling longer-term trends that will meaningfully impact your investment returns in the years to come. America, Europe and Japan are overleveraged, and the demographic headwinds of their growing non-working age populations will further hamper their respective ability to generate robust economic growth.
Conversely, many emerging market countries will be home to an exploding population with a growing working-age populace over the next several decades. We will see trends appear: more consumers, more of whom are working, and more of whom will see their incomes rise. All of these trends lead down the road to vibrant economic growth and attractive investment opportunities in these emerging market countries.
As an investor, you should come away with three immediate conclusions to this contrasting phenomenon:
- Investments centered on the developed world’s markets will be generating lower than historical rates of return for the next 5-7 years as debts are paid down and the number of retirees accelerates.
- Growing populations and thriving economic growth in emerging market countries will create more compelling investment alternatives stemming from these countries.
- Whereas investing in emerging markets used to be synonymous with investing in export-driven companies, investors aiming to make money on the future growth of the emerging markets would do well to focus on those companies that sell goods and services to consumers within the emerging market countries.
This third point is no trivial matter. The attractive emerging market company of yesteryear, exploiting its relatively low cost of labor and an undervalued currency, exported cheap products to an eagerly buying public in Europe or America. This will no longer be the primary case. Rather, today’s emerging market equity gems will be those companies that are focused on selling products to consumers living within the emerging market countries.
There’s an important concept embedded in this investment thesis. Per the World Bank, savings rates in the emerging markets have risen from roughly 10 percent of GDP in the late 1970s to 35 percent of GDP today. While it’s certainly true that poor countries and their inhabitants have become markedly wealthier in the past fifty years, this alone is not enough to drive the investment opportunity before us. More importantly, per capita GDP in many emerging market countries has more than tripled during this timeframe. Whereas an initial increase in someone’s income serves to pay for life’s basic needs, any additional increase above this initial bump leads to a big increase in that person’s consumption of goods and services.
As an example, per capita GDP increased four-fold in China from 2000-2010. In the same timeframe, auto sales in China grew to about 18 million per year. In other words, once per capita incomes rose above a certain threshold in China, the additional income earned by each person was spent on a variety of goods beyond shelter and food — in this case, cars. Therein lies the investment opportunity offered by a burgeoning emerging market consumer economy. Brazil, India, Indonesia and other countries are similarly positioned to produce more spend-happy inhabitants.
Bear in mind that the working-age population in many emerging market countries will be expanding over the next few decades, thereby expanding the number of persons whose incomes will be growing well beyond the income level needed to pay for life’s basic needs. As such, we have the demographic making of an explosion in domestic consumption within many emerging market countries.
What’s more, emerging market equities remain significantly under-owned by the investment community. Standard & Poor’s recently estimated that emerging markets accounted for approximately 80 percent of the world’s population and 50 percent of global economic output, but only 13 percent of global stock market capitalization. Institutional investors need to “get in the game” and increase their proportional exposure to the emerging market consumer over time.
How to Take Advantage of Population Growth
You may be asking, “How do I invest to take advantage of the exploding population growth over the next 30 years?”