Demographic changes – why Africa is the future

Fertility rates are falling across the globe. This raises a set of issues ranging from lower GDP growth to funding retirement benefits. It also however presents some opportunities for investors. This report highlights some of the risks and opportunities of what is likely to be a major theme in markets over the coming 20 years.
 

Risks

• Lower nominal GDP growth ahead
• Funding entitlements in ageing developed markets
• Political backlash against a tough set of options in developed markets

Opportunities

• Can artificial intelligence (AI) increase productivity to offset slowing population growth?
• Rising demand for healthcare
• Wealth management for a larger cohort of retirees
• Education in emerging markets
• Construction in Africa
• Housing the elderly
• Facilitating remittances.

Read more: Thematic view - do demographics matter?

Fertility is falling

The global fertility rate (defined as the average number of children that are born to a woman over her lifetime) is currently 2.25, just above the replacement rate of 2.1 (the rate that would keep the population number stable). By 2050, the UN expects that the global total fertility rate will be below the replacement rate.
 

Already fewer than 50% of countries across the globe have fertility rates above replacement rates, down from practically 100% in the 1950s. The UN forecasts that by 2100 fewer than 5% of countries will have fertility rates above replacement.
 

Fertility rates have been declining more rapidly than expected. Over the past seven years the estimated peak number of humans, as forecast by the UN, has dropped by nearly a billion to 10.3 billion and the timing of the peak has been brought forward, from after 2100 to 2086.
 

In 2012 there were 146 million people born around the world, which will probably be the highest ever recorded. In 2023 there were 132 million people born.
 

China has seen a 42% decline in the number of births over the past five years.
 

Africa stands out as a region with high and slowly declining fertility.
 

The future is African

The UN forecasts that the population in Africa will account for 37% of the global population by 2100, up from 19% now. The African population is set to reach 3.7 billion by 2100. Africa is going to need an immense amount of investment to simply house its population.
 

In five years, the African working population will likely be larger than China’s. In eight years, the African working-age population will overtake India’s. Thereafter the African working-age population will continue to grow, reaching 2.5 billion in 2100 vs 850 million in India and 290 million in China.

The impediments to Africa becoming rich do not lie with demographics but rather with trade policies, investment, education and other policy decisions across the continent.
 

Changes in the working-age population are a critical driver of GDP growth

Nearly all the dispersion of nominal GDP growth across the US, Japan, Germany and the UK is accounted for by changes in the working-age population.
 

Slowing working-age population growth suggests slower nominal GDP growth ahead

Annual global working-age population growth is expected to drop to 0.5% within a decade from the current 1%. By 2070, working-age population growth is expected to get to 0. Unless artificial intelligence materially improves productivity over the coming decade, global nominal GDP growth is likely to slow.

Lower nominal GDP growth poses a risk for earnings but should also lead to lower bond yields, assuming sovereign risk does not rise materially due to unfunded entitlements.
 

The world is getting older

Already 10% of the global population is above the age of 65 vs 5% in 1950. By 2100, the UN expects that 24% of the global population will be over the age of 65.
 

Already in Japan, nearly 30% of the population is over the age of 65. China is set to overtake Japan in 2060 when 37% of the population is expected to be over the age of 65. By 2085 nearly 50% of the Chinese population is expected to be over the age of 65. By that point, just 10% of the population in Africa will be over the age of 65.

There is going to be a large increase in demand for goods and services consumed by retirees

Healthcare, care facilities and wealth management are examples of sectors that will have strong tailwinds behind them. We can also expect a decline in demand for goods and services consumed by younger people.

Read more: How science is helping us live longer

Japan is an interesting case – it already has a larger percentage of the population over the age of 65 than we can expect globally by 2100. As its population has aged, industrials and healthcare materials have outperformed the Japanese market while financials and utilities have underperformed.
 

Several developed markets have seen the proportion of their population over the age of 65 increase by more than 4% over the past 20 years. Healthcare outperformed the parent country equity index in each case, with the average outperformance at 2.1% a year.
 

Six countries are expected to have more than 15% of their population over the age of 80 by 2060.
 

It is not clear how Europe is going to handle its unfunded pension entitlements in an environment where population growth is declining. None of the obvious solutions – raising the retirement age, reducing benefits, raising taxes or allowing immigration are politically popular.

It will be difficult to solve the problem without sizeable immigration. On the basis that immigration will be largely restricted to skilled individuals, the value of an education in an emerging market may be significantly greater than the price.
 

The world is entering a transition phase – with peak births behind us. Over time there will be a range of asset classes and stocks that will be affected by the transition. We will continue to monitor this developing theme.

Read more: Five for the future – key investment themes over the next decade