While an aging population is certainly a public policy challenge, it also represents an investment opportunity, says a new report from CIBC World Markets Inc.
In the report, CIBC says that, for investors and firms, an aging population "represents an opportunity to cash in on sectors that will benefit from the expanding ‘grey' market."
For Canada, the population is aging faster than many might think, it says; and, the ratio of Canadians that are older than 65 to those that are of working age is forecast to increase at a faster rate in the next decade or two than in the U.S. Canada's population will also age faster than China, Russia, and a number of major western European countries, the report adds.
This is important because, according to life cycle theory, attitudes towards risk and savings vary with age. "Our analysis suggests that Canadian households with young family heads have low or even negative savings," notes the report. "The proportion of income saved rises monotonically through the late 50s, declining after that, as individuals cut back on active work and begin tapping their assets, to finance ongoing consumption."
Some expect this to mean weak, and declining, demand for equities in the years ahead. However, the CIBC report stresses that there are reasons to be skeptical of extreme projections of demographically-driven stock market weakness.
"The unknown moves markets most. Compared to other developments, demographic shifts are… relatively predictable," it says. Also, the resource-heavy TSX is likely to be more sensitive to global growth and other external developments than domestic ones, including demographics, it says. And, low long-term interest rates are also likely to be supportive for stock valuations.
Moreover, CIBC says the evidence suggests Canadian household savings patterns will adjust gradually with age. And, it says, an aging society is likely to need more, rather than less, capital. "The resulting bidding up of required returns could help to temper an age-related savings decline, as could flows into Canada from higher savings countries, given demographic differences between jurisdictions," it says.
"Even if the market doom projections are ultimately proven wrong, as we expect, the ongoing aging of the population is a tremendously important development, one that neither firms, investors, nor government officials, for that matter, can afford to ignore," it says.
Indeed, the report says that seniors' share of consumer spending is expected to grow at roughly twice the pace as overall Canadian household outlays through the end of the decade. "Under reasonable assumptions, that segment will account for about 3%-pts more of the overall spending pie than currently, by far the largest increase of any age group," it says.
As a result, CIBC says that a number of sectors stand to benefit from an expected surge in age-related demand. "Beyond things traditionally associated with the aging process, like health care, the list of spending areas likely to see a fillip includes experiential services and goods, including varied leisure activities, travel, entertainment and tourism. It also includes financial products and services geared to the needs of a longer lifespan, as well as things like continuing education and age-friendly consumer goods," it says.
Indeed, it reports that its index of so-called "grey" stocks — which is comprised of 17 TSX-listed companies with substantial senior business, including leisure airlines, food/coffee, health, wealth management & entertainment services — has outperformed the broader TSX recently.
"Our grey index is up by about 17% this year, and nearly 30% since early 2012," it says, noting that this is well ahead of the overall TSX performance over the same period.
"The emerging markets drove equity performance in the last decade. Opportunities there will be complemented by ones near home, as the industrial countries lead the recovery," it concludes. "Canada's population is aging faster than other countries. Demographic shifts will consequently contribute to opportunities for firms and investors on the domestic front."