Business & Investment

Winners and losers due to demographic changes

As I looked up in the previous version Daily Reckoning Australia, Demographic changes are already here and the economic benefits are appearing in real time. It will take 30 to 50 years for a demographic wave to occur, but it is not too early to start allocating assets that are profitable in the short term and resistant to long-term changes.

The important points to keep in mind when doing so are as follows.

1. The biggest loser is China

The collapse of China’s vital statistics is so great that it could actually destroy the credibility of the Chinese Communist Party. It states that the Chinese themselves have lost their destiny. This can lead to internal turmoil, or even isolated states like Taiwan today.

Tibet, Xinjiang Uygur Autonomous Region, and parts of Manchuria may historically not be part of the core of Han China and may see the collapse of central authorities as an opportunity to reassert their autonomy or even independence.

On the contrary, Beijing may recognize the trends described in this report and try to consolidate its power through extreme acts such as the invasion of Taiwan.

The combination of geopolitical instability, excessive debt, reduced production and weakened justification will make China one of the most attractive destinations for capital over the next few decades.

2. The biggest winners are the United States, Canada, Nigeria, and India.

The key to growth in all four countries is that they can continue to drive growth in a world of declining birthrates. The United States and Canada do this through immigration.

Although Nigeria’s fertility rate is declining, it is still high enough (5.0 and above) to sustain population growth over the next few decades. Nigeria will be the fourth most populous in the world by 2050.

India’s fertility rate is only 2.2, declining, but it can still benefit from urbanization. This is another way to increase economic growth with little population growth.

There is a lot of corruption in Nigeria and oppressive bureaucracy in India, but all four are democracies. Democracy provides an exit to general dissatisfaction and flexibility in policy choices, which facilitates the transition to a slow-growing world.

Australia and the United Kingdom may join this group of lucky countries as they also have immigration policies that have the potential to stabilize their population despite declining birth rates.

3. Japan and Europe will be confused

The outlook for Japan and Europe’s vitals is not positive, but there are other strengths that can help respond to demographic collapse. Most importantly, they are already a prosperous society, despite slowing growth and economic headwinds. China gets old before it gets rich. Japan and Europe are old, but they are already rich.

The difference is best understood with a simple example. Suppose the country has a population of 100 million and a GDP of $ 5 trillion. This means that GDP per capita will be $ 50,000, which is a very rich country.

Now suppose the population is down 20% to 80 million and GDP is down 10% to $ 4.5 trillion. GDP per capita is currently $ 56,250. Total GDP Decline 10%, but GDP per capita gain 12.5%. Despite the poorness of the whole country, the people of the country are richer. The reason is that the population declined faster than GDP, resulting in higher per capita production.

Overall production declines are generally not good, and if you’re trying to manage a huge nominal debt burden, as most developed countries do, that’s definitely a problem. .. Still, if the population is shrinking faster than the economy, it’s not automatically disastrous. The key is to use technology, AI, and natural resources in ways to increase the productivity of each worker, even as the total number of workers declines.

This is not as easy as it sounds. Many developed countries suffer from high taxes, high debt burdens, over-regulation, and damage to green policies based on climate warnings. Still, for countries that can avoid policy damage and make good use of technology, there are ways to move forward even when the population is declining.

4. Latin America has poor performance, but not as bad as China

Birth rates are also declining sharply in major Latin American countries. Brazil is already well below the exchange rate (1.5) and Argentina is slightly above (2.2), which is declining.

None of the Latin American countries are particularly open to immigrants as a substitute for indigenous births, and no country has achieved a high-income position to provide relief to Japan and Europe. Declining agricultural production and demand for natural resources as a result of global population decline will also be a headwind for economic growth.

Still, Latin America has some advantages that China does not have. The region has a relatively open capital account and relatively free trade. This allows you to benefit from the comparative advantage of input costs and unit labor costs. Most Latin American countries are also democracies and are more resilient to economic stress than dictatorships and totalitarian governments.

Brazil, in particular, is far ahead of China in its consumer-led economy. Mexico, Brazil and Venezuela can all rely on hard currencies from energy exports, which are still in high demand even in a declining world. Growth does not stop, it slows down, and the growth there consumes a lot of energy.

Latin America falls into the category of turmoil, albeit from a much lower base than Europe and Japan. Russia could be economically similar to Latin America because of its ability to rely on exports of natural resources, despite domestic population and productivity challenges.

Indeed, these are high-level long-term forecasts. Wise asset allocation relies on a more accurate analysis of a particular industry, company or sector. There will be winners in even the most challenging economies (except for China, which has a flawed rule of law and political turmoil in addition to vital challenges).

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Good performing sector

Despite the small population and low overall growth rate, the specific sectors that work well are:

•• energy. All energy sectors, including renewables such as oil, natural gas, wind, solar, hydro and nuclear, will all be successful over time. Even in a slow-growing world, energy usage increases exponentially. Demand for oil and natural gas will continue to grow as renewables cannot grow fast enough to fill the gap.

•• Healthcare, Elderly Care, and Biomedical Research As the population ages, it will grow strongly. Even if the decline in fertility slows overall population growth, the elderly population will continue to grow for decades. With aging, dementia, Alzheimer’s disease, and Parkinson’s disease develop in addition to the usual demands for life support. A low fertility rate means that there are few prime age cohorts to care for the elderly. This puts technology, treatments and assisted living at the forefront of elderly care.

•• Robotics and artificial intelligence. With the decrease in the labor force and the increase in labor demand due to low-productivity activities such as nursing care for the elderly, there is a strong demand for productivity improvement worldwide. The Internet and mobile devices are ubiquitous and convenient, but it’s not clear if they will help you significantly increase your productivity compared to previous technologies such as catalogs and phones. Online shopping may not be important if you have few shoppers. However, robotics and AI clearly increase productivity and not only increase the production of the workforce, but also make it available in place of the workforce. Robotics and AI will be an important bridge between the need for workforce shrinkage and growth.

•• Gold is essential for a healthy portfolio.. The future of lower production and higher wages is a recipe for inflation. That particular combination was called stagflation in the late 1970s. The actual economic stagnation depends on the ability to use energy and technology to improve productivity. Still, inflation is almost certain, both due to high wages and the need for countries to reduce the real cost of huge debt burdens. The rise of cryptocurrencies, central bank digital currencies, and non-bank payment channels can make money itself a cloudy concept. Investors look for money in a worthy and reliable store with an unquestionable history. Money fills the invoice.

Demographic collapse is inevitable. It has already been incorporated into existing fertility rates and probable trends. Still, it’s not the end of the world. It is not the end of mankind. But it will end the economic paradigm of higher growth, higher consumption and higher production that has prevailed over the last 200 years.

The new paradigm consists of a small number of people in big cities. This is an unprecedented form of urbanization that goes beyond what we already know. Legacy industries such as automobiles will get lost. Health care in general, especially elderly care, is booming. There is no shortage of investment opportunities. Still, investors need to avoid many traditional investments that have worked well in the past but play little or no role in the aging and highly urbanized future.

Until next week,

Jim Rickers signature

Jim Rickers,
Strategist, Daily Reckoning Australia

PS: This content was originally published by Jim Rickards’ Strategic Intelligence Australia. This is a financial advisory newsletter designed to help protect your wealth and benefit from the events of the invisible world.

Winners and losers due to demographic changes Winners and losers due to demographic changes

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