Demographics gives insight into future population growth, which can reveal present and future consumption trends and economic cycles. People tread a relatively well-worn path of increasing consumption until hitting middle age, where they shift toward saving more. In developed nations, most economic activity derives from consumption. In developing nations, most economic activity originates from the manufacturing sectors, as products are exported.

Study of Human Populations

Demographics is the study of human populations. In recent decades, it has become an increasingly popular lens for economic forecasting. Researchers have found that long-term economic cycles move with demographic trends. Studying economic history without taking into account demographics is futile. The most pertinent example is the baby boomer generation that followed World War II. This massive population explosion fueled the consumption-based growth of the U.S. economy through the 20th century.

As this generation hit its peak consumption in the 1970s, inflation also boomed with the consumer price index, or CPI, climbing from the low single digits to record levels. As this generation began to age, its consumption began to decline, leading to a moderation in inflation. This is a simplistic, single variable lens to examine the multivariable system that is the economy; like any theory, it can never be fully proven.

Consumption Trends in Aging Societies

By giving more depth to the age structure of populations, demographics allows an investor to understand the composition of current consumption and future consumption growth. With this insight, investors are able to better position themselves for the future. For example, aging populations mean increased business for consumer staples, health care and pharmaceutical companies. Additionally, companies selling financial products, such as brokerages, insurance companies and asset managers, do better.

Fixed-income markets tend to have a consistent bid underneath them. An example is Japan, which has dealt with an aging population and declining population growth for many years. Since the mid-1990s, Japan's population growth has been below replacement. It became the first country in the world to sell more adult diapers than baby diapers. As of 2015, the population is aging in developed countries all over the world, driving demand for health care and medicines. This has also created a massive bull market in these stocks over the last decade.

Consumption Trends in Young Societies

In contrast to Japan are countries with young populations such as India or Brazil. In these countries, investors are better served to focus on growing industries such as technology, consumer discretionary, infrastructure, real estate and travel. There is more opportunity given that incomes and total consumption continue to increase as the population grows and grows in average age.

Some of the most lucrative investments have benefited from underlying demographic trends that may have been unknown to investors. The biggest bull market over the last three decades has been in real estate in China and India. As the population matures, there is more demand for housing, which leads to rising real estate prices. This time period also saw strong demand for infrastructure as this growing population began to buy new cars in addition to new homes. This created demand for commodities such as steel, iron ore, rubber, copper, etc., leading to a bull market in these assets from 2000 to 2008.

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