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Major demographic changes set to greatly impact investment opportunities, says Dexia AM

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Dexia Asset Management (Dexia AM) latest research paper, Demography – Challenges and Opportunities in a Changing World, examines the global challenges resulting from the two major demography trends of growing and ageing populations and identifies five pillars of business opportunities and solutions that will create both value for investors, along with sustainable benefits.

 

Sophie Deleuze, Senior SRI analyst at Dexia AM, says: “Growing and ageing populations are having significant consequences on a variety of aspects of life – from the composition and skills of the global workforce, to the consumer base and the natural environment. Companies that can adapt to these conditions will not only create commercial advantage, but also sustainable benefits for the markets they serve.”

The five specific demographic-driven changes that Dexia AM believes will offer significant potential business opportunities in the future are: skills shortages, greater demand for basic and essential goods and services, wealthier consumers, ageing populations and increasing pressure on resources and the environment. Related to each of these changes, Dexia AM has identified business opportunities to offer solutions targeting the needs of companies and individuals, with a focus on those presenting sustainable benefits:

Skills shortages – They are region and sector specific and affect both the local and global workforce. In Europe,even with rising participation rates, by 2020, labour shortages due to skills gaps are likely to occur. In high-growth markets such as China and India talent shortages are also critical. Attractive investment opportunities can be found amongst companies offering business solutions such as Education Services, Employment & Outsourcing Services and Automation Services. A well-positioned company is for instance Pearson, with over 70% of its revenues derived from education-related services and over 20% of its revenues coming from Asia and other parts of the world, presenting it with strong opportunities to expand in unsaturated and emerging media markets.

The ‘Base of the Pyramid’ (BOP) consumer market – There are over four billion people worldwide with incomes below $3,000 in local purchasing power and who lack in a number of essential needs and services. Despite the low wages the market is currently estimated to be worth $5 trillion. In this context, access to affordable healthcare, food, finance and telecoms offer opportunities for companies to become major providers of sustainable business solutions. An interesting player in the telecoms area is Millicom International Cellular which offers mobile telephony and cable services in 13 emerging markets in Latin America and Africa. It has developed a successful strategy offering mobile telephony services to lower-income retail segments, mostly through prepaid services with low denomination charges.

Ageing population focused products – From a social perspective, there is growing concern for maintaining quality of life for ageing populations, as well as an increasing need for improved healthcare services. From an economic perspective, ageing populations have specific needs with regard to savings, investments and the safeguarding of financial security. Well-positioned companies are those serving needs for “Healthier Living & Quality of Life” and “Financial Security”. In the field of care homes, Orpea(the largest operator of care homes in France which is also active in other European countries) is well positioned, not only thanks to its long term expertise in care home management but also becauseit has turned key differentiating factors into tangible opportunities (such as through the early development of special Alzheimer units in its care-homes) and its proactivity in fields such as human resources management.

Scarcity of resources and associated concerns related to environmental pollution– Resource scarcity and pollution is intensifying as a major issue. With global populations set to reach 9.3 billion by 2050, food demand already exceeds current projected increases in land used for farming. On top of this, issues relating to water scarcity  are set to become more acute in a number of regions. These concerns can manifest themselves and intensify in areas which are undergoing rapid urbanisation resulting in further problems such as overcrowdedness, contaminated water, poor sanitation and air pollution. Other resource and environmental pressures such as increasing energy demand will continue to rise. Financial and sustainable investment value is to be found in companies focusing on Food Productivity, Hygiene & Sanitation, and the Management of Resources. An interesting player in the Hygiene & Sanitation field is Suez Environnement. It offers a fully integrated range of services along the water and waste value chains and is present in 25 countries. Suez is well placed to take advantage of the continued growth in international water projects, notably through its continuing presence in China.

Demographic trends are complicated affairs and have a multitude of knock-on effects: from skills-shortages, to new consumer needs, to issues of resource scarcity and environmental degradation. In the identification and selection of companies, major growth and opportunities appear to be much more prevalent among small and medium sized companies compared to larger Caps. For the most part, the market appears to have already integrated demographic trends into company valuations and growth prospects of companies which are well-aligned to provide business solutions. However, there are still opportunities available to invest in companies with lower valuations and promising growth potentials. To identify these opportunities requires a thorough understanding of the far-reaching impacts and regional variances of demographic trends, together with comprehensive analytical frameworks.

Dunn says: “As the challenges brought by growing and ageing world populations are not going dissipate any time soon, the ability to recognise different investment opportunities and to act on them will be imperative for investors.”

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