Demographics Uncovered: How Demographics Affects and Influences All Aspects of the Economy, Finance, and Politics. 2021. Amlan Roy. Wiley.
Demographics is destiny. This cliché will make some investors nod in agreement, but it has little meaning. Demographic data is often used to bolster an investment narrative, but detailed details about its link to asset returns are often missing. amlan royAn economist working at the intersection between demography and investment, he provides a comprehensive review of how the study of population affects many of our fundamental investment and policy decisions.
This volume covers all topics associated with population dynamics, from aging to geographic movement, and can serve as a comprehensive guide to how demography affects asset pricing, pension management, health, retirement and politics. Rather than a simple problem of births, deaths, and aging, Roy frames demographics as a driver of the returns to the mix of tastes and numbers. Population numbers count, but the changing tastes and behaviors of different age groups drive markets.
The book is divided into six main subject areas: core demographic fundamentals; population dynamics; the impact of demography on the macroeconomic environment; the link between demographics and asset prices; health and longevity problems between populations, pensions and retirement; and the effect of demography on quality of life, gender, governance and sustainability. Each theme is linked to long-term returns and relative prices across all asset classes and market sectors.
The central population themes, which are the basis for demographic analysis, are all well presented. Aging, life expectancy, fertility and dependency create economic problems that need to be addressed by both investors and policy makers. Changing demographics create headwinds and tailwinds for policy and asset prices that are inescapable and have no simple solutions. Roy discusses how decisions made more than a generation ago will support or affect future generations, forcing countries to transition between underpopulation and overpopulation. One country may face excess births while another deals with aging. Each affects capital allocations and returns. Roy, through clear graphic analysis, highlights the dynamics of these central themes.
The chapter on demography and macroeconomics highlights the central observation that population dynamics create market constraints. Demographics affect economic growth, living standards, inflation, public debt, capital flows, and exchange rates. Population dynamics influence the relative growth of the country as consumers age and move through their life cycles. The combination of the population sets political preferences through voting and drives policy choice constraints. Increases in population will limit opportunities for both older and younger citizens.
Roy dusts off the central theory of consumption (the life cycle and permanent income hypotheses) and relates demographic changes to the behavior of asset prices. As populations age, their behaviors shift from spending to saving, thus influencing the demand for safe and risky assets. Whether it’s the equity premium or real interest rates, population dynamics will always put pressure on returns. As is well documented for China and India, population dynamics along with tastes also drive commodity markets. Roy makes the critical point that age alone does not drive markets. The combination of population and tastes generates demand pressure in the markets.
Populations want to survive and prolong longevity, so health becomes a central focus with respect to spending. Just as fertility drives demography, life extension stretches the population with new demands. As income increases, there is a corresponding change in the composition of populations and the demand for better health services increases. Longevity changes tastes and moves headlong into quality-of-life issues.
Longevity and the aging of the population focus on the key investment themes of retirement and pensions. Returning to consumption patterns, Roy explains how if you expect to live longer, retirement planning and health care costs become even more important. When aggregated across generations, pension decisions weigh critically on returns and insurance and asset management businesses. Trillions of dollars are being allocated to address a highly uncertain problem. Who will pay and at what cost are critical pension issues that are only exacerbated as the population structure increases for older generations.
The book ends with a discussion on fundamental issues such as quality of life, gender, governance and sustainability. Views on gender and work upend many past demographic assumptions. Longevity highlights happiness and quality of life, while intergenerational transfers represent more than wealth and include the state of the world. These issues are hard to quantify, but Roy provides a holistic approach by connecting these issues to the core assumption that demographics along with taste define our future.
Demographics revealed provides an extensive and well-documented review of financial and economic research influenced by demographics. This allows the reader to be exposed to the key topic of the investigation; however, it makes for a longer, less lively work that sometimes reads like a review of academic literature with a citation-author-and-conclusion approach. Charts are extremely useful for visually telling the demographic story, but these complex charts are sometimes hard to read on their black and gray template.
Roy provides in one volume everything an investor needs to know about the impact of demographics on investing; however, connecting the research to core investment questions would have made for a more compelling story. Given the author’s long history of consulting in this area, it would have been helpful to show readers how to integrate background research with investment decisions. For example, how should a pension investment committee use this information to improve allocation decisions? The answers are not immediately obvious.
While demographics are fate, our future can be changed with the right thinking. Demographics drive demand and prices, but with the right lens, we can better see these trends and adapt to these headwinds and tailwinds. If a reader wants to be aware of demographics, this is the book for him to read. Demographics revealed It should spark deeper discussions about integrating demographics with investment, and if investment committees take the time to integrate this thinking, better performance may be the result.
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All messages are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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