Contributed by: Meera Siva, CFA
If you thought death and taxes are the only sure things in life, think again, says Richard F. Hokenson. In his talk to the Chennai Chapter of IAIP on October 3, he makes a case for how demographic patterns are affecting investments and the world is on a race to zero interest rates. Richard should know, as he is an economist with many decades of experience in demographics. He is the Senior Managing Director of Global Demographics at Evercore ISI where he is responsible for analysis and forecasting of international demographic trends and their associated economic and investment implications.
Era of deflation
Between 1930 and 2015, the world population has grown from 2 billion to 7 billion. Typically, there are dire predictions on shortages when there is a growth in population. However, in this period there has been a decline in the Dow Jones-AIG Commodity Index, adjusted for inflation. This is thanks largely to output improving over time globally.
This and other data point to the fact that we are in a dis-inflationary world. Commodity prices will mostly move lower. Inflation has been on the lower side, and central banks are missing their inflation target. Interest rates are racing to zero.
Over the long term, interest rates converge towards GDP – yields on US long-term treasuries and nominal GDP have always moved together. Nominal GDP is actual growth and actual inflation and interest rates reflect expected growth and inflation.
And nominal GDP is influenced by labour force – population, employment, participation and hours worked. Historically, in the US, between 1960 and 1980, there was population growth. This created higher demand from the young work force for houses, goods and services. Demand could not keep up fast enough, leading to inflation and interest rates moved higher.
The opposite happened post-1980. Positive demand shocks slowed, population became older, more efficient, as supply curve shifted faster than demand curves. This has brought us to the dis-inflationary world in developed countries.
Population growth is a big factor in demand supply dynamics. Currently, almost 46 per cent of the world lives in countries with falling birth rates. And the existing population is ageing fast. Japan leads the pack, with China at number two. There are eight million empty homes in Japan and its population will peak in 2020. The disadvantage for China is that unlike Japan, it will age before it gets rich. Growth rate has slowed from 10 per cent to 5-6 per cent now.
Another country with demographic issues is Russia. While the current generation is expected to live longer than their parents in most other countries, suicide and alcohol has reduced life expectancy.
For India, placing emphasis on primary and secondary education is vital to capitalize on the demographic advantage it currently has. On the other side, in eastern countries such as India where the elderly lived with their family, may not have a family member to live with in the future. This may necessitate nursing homes, assisted living and retirement homes
Ageing population also means a shift from products to services. Among the various services, international travel may be one segment where there can be good growth as seniors demand new experiences. Products such as cars may face falling demand as there the driving age population shrinks.