There is but one Warren Buffett, a nonagenarian investor who continues investing into his 90s. However, his investing philosophy has not changed much over these many years. He is a value investor — and a passive one — who believes in investing in good businesses with a strong moat, trading at less than their intrinsic values. And he is a long-term investor.
Throughout most of Buffett’s life, the US was reaping a demographic dividend. And it may continue to do so despite high-income countries experiencing lower births than deaths.
Higher inflation, lower growth and a smaller working population — in particular, if productivity cannot compensate for the smaller workforce — is often termed a demographic drag. On the other hand, technology, automation and AI can raise productivity. But this is a slow process.
Throughout most of Buffett’s life, the US was reaping a demographic dividend / Photo: Bloomberg
According to the United Nations, based on its population report in 2022, for high-income countries between 2000 and 2020, the contribution of international migration to population growth (net inflow of 80.5 million) exceeded the balance of births over deaths (66.2 million). “Over the next few decades, migration will be the sole driver of population growth in high-income countries,” the 2022 UN report says, as the number of deaths will exceed the number of births in these countries.
Many trends are likely to intersect as the population ages and these are increasingly evident in South Korea, Japan, Taiwan and Singapore, and are likely to materialise in China. In general, an ageing population is usually expected to be deflationary as the spending power is removed, notes a 2021 report by LGT Bank.
However, a decline in the working population may see upward wage pressure, which with higher taxes may push up inflation. Deeply indebted nations with increased issuance may have to pay more on their debt, LGT observes. Concerns abound over the cost of supporting a large older demographic in countries from Japan to Europe.
In a mid-2022 report titled Panorama by UBS Asset Management, Manoj Pradhan, founder and CEO of Talking Heads Macro, points out that with a shrinking workforce, China can no longer have the deflationary impact it once had.
In his view re-shoring, on-shoring and friend-shoring could have an inflationary impact. “As we get more siloed economies, they become subject to their own local demographic constraints. And given workforces globally are shrinking, we are entering a period which will likely be in sharp contrast to the previous 30 years where demographics brought inflation down,” Pradhan adds.
In addition, pension plans and social security have created problems in some high-income countries. If the valuation of these plans shrinks due to inflation or other issues such as poor investment decisions, either pensioners will become poorer, a shrinking younger working population bears some burden, or there is a shift to funded, defined contribution plans — such as Singapore’s CPF structure. Here, each individual saves for his/her retirement during his/her working life and bears the investment and longevity risk.
Some solutions are met with protests. For instance, UBS suggests that countries can be flexible on retirement ages. Here, the retirement age is made to automatically rise to stabilise dependency ratios. Notably, plans and proposals to raise the retirement age in France have been met with uproar so far. Secondly, pension plans can be multi-tiered, or boosted with annuities. Undoubtedly though, market volatility will always impact pension plans.
Trade between countries, and open markets for capital, goods, services, and labour, can help offset demographic constraints, adds UBS. Just as Singapore companies have been encouraged to regionalise away from the island’s small market, retirement savings can be invested across borders for higher returns. Sovereign wealth funds, including our own, have done so.
For Singapore-based investors, S-REITs have become a popular avenue for the older demographic because of their yields. While problems have arisen as rising interest rates expose weaknesses in this investment class, rated S-REITs with responsible sponsors, sound properties and sensible capital management can help supplement incomes.
“Demographics are neither doom nor destiny. Instead, it is a decisive factor with implications for economic growth, investment returns and financial security in old age,” the LGT report says.
While Warren Buffett may have solved the demographic drag for Berkshire Hathaway, governments have not yet done the same for their electorate.
