Demographics and Destiny

"Demographics is destiny" is an overused phrase. And to make things worse, it isn't even true. Demographics isn't destiny, but it does play a major role in the rise and fall of civilizations, which may influence where you invest.

So we thought it would be interesting to see how the populations represented by the international exchange-traded funds we follow stack up against the U.S. in terms of demographics.

Using estimates from the U.S. Census Bureau, we calculated the expected population growth over the next generation, or 25 years, as well as the percentage of the population age 65 years or older, both now and in 2032. For single-country ETFs this was easy, but for the regional funds we used a weighted average of the constituent countries.

The biggest surprise we found was that, over the next 25 years, the U.S. will be among the fastest-growing populations in the world -- faster than many emerging markets and outpacing the average growth of the members of the MSCI Emerging Market index fund (EEM Quote). The U.S. is expected to grow 23%, from 301 million people now to 357 million people in the next quarter-century.

The population represented by the MSCI Emerging Market index is expected to grow 18% over the same period, dragged down by double-digit population declines in South Africa (11% of MSCI Emerging Market index assets) and Russia (9%), as well as virtual stagnation in Korea (16%).

This is partially offset by a population explosion in India, though Indian companies are only about 5% of index assets. Meanwhile the one-child policy for urban couples in China, which has the iShares FTSE/Xinhua China 25 Index (FXI Quote), has resulted in a relatively slow-growing population, along with a host of other unintended consequences (too many baby boys).

Japan is facing substantial population declines over the coming quarter-century, and the country also drags down the overall population growth of countries in the MSCI EAFE index fund (EFA Quote) of developed markets, since Japanese companies account for nearly 24%. The U.K. is preferential to continental Europe, where population declines in Germany, Spain, Italy and Finland are expected to decrease the overall population growth rates for the S&P Europe 350, despite U.K. companies representing almost one-third of that index.

Population Growth Estimates (2007-2032)

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Source: U.S. Census Bureau and AltaVista calculations

A graying population is something that all markets have in common. Japan has the largest percentage of people over 65, with Europe not far behind. And Japan's "elderly burden" will get worse, although Canada, represented by the iShares MSCI Canada Index (EWC Quote) is likely to eclipse Japan as the country with the biggest imbalance by 2032.

The U.S. has the youngest average population of any developed market, and is expected to keep that designation in the future. But Latin America and Brazil, with its iShares MSCI Brazil Index (EWZ Quote), take the overall prize for the youngest populations, both now and in 2032.

China may be the first country in history to grow old before it gets rich. By 2032 its elderly burden will be nearly as high as it is in the U.S., but the country won't have nearly the same resources on a per capita basis to deal with the challenges.

Projected Percentage of Population over 65 (2007 and 2032)

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Source: U.S. Census Bureau and AltaVista calculations

What does all this mean? Unfortunately it isn't likely to generate any short-term trading ideas, but it does provide some perspective for a thematic approach to international investing:

• The U.S. is relatively well-off compared with other developed markets. It will be better able to grow its way out of its problems, and its companies could see faster earnings growth, which in turn would justify the slight premium U.S. companies get over European firms (Japanese companies are still more expensive).
• China-hype may be misplaced. China may simply lack the manpower necessary to sustain the kind of growth rates investors have come to expect. The country is older than other emerging markets overall, and is likely to see much slower population growth. Twenty-five years from now India will have the world's largest population, about 100 million ahead of China -- and they'll be much younger, too.
• The question of whether Japan is emerging from a 15-year economic slump is academic. In the long run -- there is no diplomatic way to say this -- the country is dying. Global winners like Toyota are relatively immune and may thrive regardless, but the fortunes of most of the companies in the MSCI Japan Index are undeniably linked to the vanishing Japanese consumer.
• Canada is getting older quickly, but that may not matter. Exploitation of its oil sands could turn the country into a nation of wealthy pensioners. Similarly, Australia, represented by the iShares MSCI Australia Index fund (EWA Quote), is getting much older, but will exhibit decent overall population growth and is rich in natural resources that could have a bigger impact than demographics.

To be sure, there are shortcomings in this analysis. First, population estimates could be wrong. Societies can undergo significant changes in a quarter-century that could alter birth rates, death rates and immigration, and as a result, demographics. And as alluded to in reference to Toyota, in our global economy it probably makes less difference where a company is based today than it did a generation ago.