Population 7 billion
On 31st October 2011, the world’s population reached 7 billion for the first time. Such marginal increase in population therefore presents an increase in demand for feeding, clothing and housing this vast number of people, providing them with transport, heating, healthcare etc. This thus creates opportunities for investors who are able to tap into the resultant shifts in global spending patterns.
As well as being much larger, the population is distributed differently today than in the past, with much greater concentration of people in towns and cities. In 2008, the number of people living in urban areas surpassed the number in rural areas for the first time. By 2050, it is expected that 70% of us will live in urban areas.1
As such, growing urbanisation is resulting in rapid expansion of the cities. In 1975, the United Nations estimated that only three cities had a population of more than ten million people: Tokyo, New York and Mexico City. By 2005, that number had risen to 20, and by 2025, the UN estimates the total will be 29 million. Of these, 24 million will be in the emerging world. By 2050, emerging market population is expected to make up 83% of the world’s urban population. 2
How can investors take advantage of the opportunities presented by changing global demographics?
A thirst for commodities
Although commodity prices have fallen in recent months as a result of concerns that global growth is slowing, demographic shifts continue to underpin the long-term case for commodities. According to estimates, 350 million people are expected to move from rural to urban areas in emerging markets between 2010 and 2015, with each new home using around 40 kg of copper in its plumbing, wiring and appliances. New emerging market consumers are also fuelling demand for commodities for other sectors, such as Gold used in Indian wedding rings to the palladium used in catalytic converters in China’s cars.
Meanwhile, a lack of investment in new production has meant that supply has struggled to keep pace with demand. Falling prices in the 1980s and 1990s provided little incentive for commodity producers to build out new capacity or upgrade existing infrastructure. Many manufacturers and other industrial commodity users thus adopted just-in-time inventory practices in order to minimise storage expenses, meaning that stockpiles are limited.
These factors mean demand for many commodities is likely to continue to outstrip supply for many years to come, contributing to attractive long-term returns for investors in commodity stocks.
Building the cities of the future
1Source: National Geographic, 30 October 2011
2Source: United Nations
A major cause of the thirst for commodities is also infrastructure development, particularly in emerging markets. Urbanisation means emerging markets have readily available labour forces, keeping wage costs cheap and allowing companies to expand rapidly – key competitive advantages in the global marketplace. However, the influx of new inhabitants places a strain on basic services in the cities –public transport, roads, electricity and water, creating a pressing demand for investment in infrastructure.
Meanwhile, growing demand for emerging market exports has overstretched local infrastructure, which is already weak in many cases as a result of years of underinvestment. Emerging economies have a pressing need for increased capacity if they are to maintain and extend their competitive advantage. As a result, investment in power stations, airports, railways and other infrastructure has become a key priority for regional businesses and governments, with spending projected to grow rapidly in the coming years.
For investors, the infrastructure theme offers broad opportunities across multiple emerging market sectors – from resource producers to utilities, from airport operators to financing providers – in a tangible growth area.
As emerging market citizens move from rural to urban areas, their spending patterns will naturally change. As a result, rapid population growth and urbanisation in emerging markets are driving demand for products ranging from disposable nappies for babies and mortgages for home buyers to mobile phones and cars for new city citizens. City workers demand better living standards, using their higher wages to pay for basics such as new fridges and furniture. Over time, greater disposable incomes will fuel aspiring spending such as better electronic goods, branded clothing and personal transport.
Tapping into the shifting spending patterns of emerging market consumers offers compelling investment opportunities. The rapid rise in disposable incomes resulting from global demand for emerging market goods and services means emerging market countries are set to dominate consumption. In 2007, emerging market consumers already began to outspend their US counterparts. By 2015, they are forecast to account for 37% of global consumption.3
Moreover, even during the financial crisis, emerging market consumers kept buying, helping to buffer many emerging economies from the global recession. While sales of consumer goods in developed markets fell 14% between 2007 and 2009, demand in emerging markets kept growing, increasing 11%.4
Benefiting from population growth
Source: Credit Suisse4Analysis based on 254 members of the MSCI All Country World Consumer Discretionary Index. Sources: Company reports, MSCI, Compustat, Worldscope, Bloomberg, J.P. Morgan
Rather than investing in a particular sector or region, theme funds seek to take advantage of sustainable, long-term investment trends resulting from changes in demographics or global spending patterns. As always, seek advice to learn more about which Funds best suit your investment approach. Speak to a deVere Financial Adviser today by sending an email to >clients@devere-group.com
Mark Riggall, Head of International Strategic Alliances JP Morgan Asset Management