Demographics Should Factor into Investment Strategies
Andrew Leckey

Demographics will be playing an increasing role in long-term investment.

A global potpourri of aging populations, rising middle classes and out-of-kilter national economies must be factored into individual strategies for the future. Savvy investors consider such things ahead of time, rather than as they occur.

If, for example, you can put current headlines out of your mind for a moment, the powerful future impact of health care is unavoidable.

"In spite of all the debate going on in Washington right now, there is clearly going to be increasing global demand for health care because of aging populations not only here, but in other places like Europe and Japan," said Louis Harvey, president of the Dalbar Inc. financial services research firm in Boston.

Demand for pharmaceuticals, physicians and hospitals could produce the world's largest growth industry over the next 20 years, Harvey predicted.

"Baby boomers have driven investment themes throughout their lives and, as they start to retire, expect them to take on more health care," added Thomas Forester, portfolio manager of the $83 million Forester Value Fund in Chicago, whose five-year annualized return of 4 percent ranks near the top of the large value fund category. "That's one reason why our fund owns a lot of stocks in that area."

Within big pharma, stock of Pfizer Inc. (PFE), the world's largest pharmaceutical firm, is recommended by both Harvey and Forester. Harvey also likes Abbott Laboratories (ABT), while Forester recommends Bristol-Myers Squibb (BMY).

Shrinking populations and the shrinking economies that accompany them have become a worry in many countries. A central bank will tend to reduce interest rates to try to compensate and breathe some life into the economy, which takes a heavy toll on the traditional fixed-rate holdings of senior citizens.

"Populations are declining globally, with Japan already shrinking and Europe to begin shrinking in a while," said Richard Hokenson, president of Hokenson & Co., a demographics and financial consulting firm in Lawrenceville, N.J. "In fact, the U.S. is projected to be one of the few countries that in 2050 will actually have a growing population."

When an environment is unfavorable to fixed-rate holdings, investors turn to stocks -- and those that benefit from demographic trends will be the most attractive. Hokenson agrees with Harvey and Forester that health care will provide strong returns, and he would add the leisure, travel and financial services industries as well.

Rising middle classes will wield considerable financial clout.

"The expanding affluence of China and India creates an entirely new cast of potential investors that didn't exist 20 years ago," said Harvey. "This middle-class sector will have enormous demand for investments, goods, services and energy."

That's why he likes major household brand companies that supply food and other consumer staples. Kraft Foods Inc. (KFT), Procter & Gamble Co. (PG) and General Mills Inc. (GIS) are his recommendations

Another trend to watch: The "echo boom," of the children of the baby boomers, is entering its high-consumption years. There are almost as many of them as baby boomers, but Forester believes their personalities differ considerably.

"Members of the echo boom tend to be a little more cost-conscious and less showy than the boomers, with a Scion fitting their mind-set better than a Cadillac would," Forester said. "I don't think you're going to see echo boomers looking for the big so-called 'McMansions' because they will be less likely to flaunt what they have."

Based on the logic that echo boomers will fix up rather than show off, Home Depot Inc. (HD) and Lowe's Companies Inc. (LOW) are favorable long-term stocks, Forester said.

Today's young people spend an incredible amount of time online, whether sending e-mail or texting, which Forester deems a strong signal for the future. Microsoft Corp. (MSFT) stock should prosper because Netbooks and other computer-related items are portents of much more to come.

Financial demographer Hokenson spends a lot of his time handicapping prospects of the world's economies and considers some to be in deep trouble.

"If Russia was Catholic, you'd call in a priest to give it the last rites since its problems include a declining life expectancy of its citizens from serious factors such as alcoholism and suicide," Hokenson said of that oil-driven economy. "Meanwhile, China will hit the economic wall less than 10 years from now because of its declining population and declining workforce."

The poor wealth distribution in China is already fueling a lot of resentment there, Hokenson noted. For example, since workers moving from the farms to cities can't afford rent or apartment purchases, the factories that employ them must put them up in dormitories in order to be fully staffed.

A rising middle class in India won't be enough to erase its unique shortcomings, he believes.

"India has a labor force that is mostly illiterate, with a small portion well-educated and well-trained," observed Hokenson. "That's why I don't think we'll be seeing many manufactured consumer goods stamped with 'Made in India.'"

Finally, in Latin America the long-term possibilities for Brazil are the most attractive, Hokenson said. Its population is aging, but is doing so very slowly. Meanwhile, President Luiz Inacio Lula de Silva has enacted some sound agricultural and natural resources policies, and a significant middle class has been emerging.