Demographic Dividend

As a rule of thumb, countries experiencing demographic dividends often benefit from increased productivity, savings, and investments. By analysing the demographic dividend of a country, investors can identify emerging investment opportunities and revise their portfolio allocations, which helps in maximising their returns.

Let us understand the demographic dividend meaning, explore some profitable investment sectors, and learn how to identify and manage demographic dividend shifts.

What is a demographic dividend?

The term “demographic dividend” represents the economic benefit that a country gains from changes in its population age structure. It usually occurs when:

• The proportion of the working-age population (typically defined as ages 15 to 64) is more than
• The dependent population (children and elderly)

Let us understand how the working-age population contributes to the demographic dividend:

Increased productivity

• A larger working-age population means more individuals actively participating in the labour force.
• This leads to increased productivity as more people contribute to economic activities such as:
  • Production
  • Consumption, and
  • Investment
    

Reduced dependency ratio

• The dependency ratio measures the number of dependents (children and elderly) relative to the working-age population.
• This ratio decreases when the proportion of working-age individuals increases.
• A lower dependency ratio means there are fewer dependents per worker.

This situation reduces the financial burden on the working-age population to support dependents.

Higher savings and investments

• Countries with a larger working-age population lead to:
  • Higher savings, and
  • Investment rates
• Working-age individuals usually have higher incomes and savings capacities compared to dependents.
• With more individuals in the workforce, there is a potential for increased savings.
• These savings can be channelled into investments in:
  • Physical capital
  • Human capital, and
  • Technological innovation
    

Consumption patterns

• Working-age individuals are typically in their peak earning years.
• This increases consumption levels, which, in turn, stimulates demand for goods and services.
• Countries experiencing increased demand are often prosperous and sustain economic expansion.

In which sectors can you invest?

As discussed above, a demographic dividend shows that a large proportion of a country's population is in the working-age group. This demographic profile leads to increased consumption. Investors can capitalise on this by investing in companies that cater to the consumption needs of this demographic, such as:

• Consumer goods
• Retail, and
• Entertainment sectors

Let us also take a look at some other popular sectors:

How does analysing demographic dividends help in portfolio diversification

By analysing demographic dividends, investors can identify risks associated with ageing populations. They can mitigate these identified risks by diversifying their portfolios across sectors that are poised to benefit from the demographic dividend.

Let us understand this better with a hypothetical example:

The scenario

• An investor holds a big portfolio of financial securities in country ‘X’.
• They conduct thorough research on country X's population demographics.
• They identify that the country currently benefits from a demographic dividend due to its large working-age population.
• However, the investor also observes that country X's population is ageing gradually.
• They identify:
  • The birth rate of country X is declining, and
  • The life expectancy is increasing

Risk identification

• By analysing the demographic dividend, an investor identifies several risks associated with the ageing population in country X, such as:
  • Increased healthcare expenditures
  • Pressure on pension systems
  • Reduced workforce participation

The hedge

• To mitigate the identified risks, the investor decides to diversify their investment portfolio.
• They rebalance their portfolio by diversifying across sectors that are:
  • Poised to benefit from demographic dividend, and
  • Less susceptible to the challenges of an ageing population
• They choose sectors that cater to the needs and preferences of the working-age population.

The rebalancing

• The investor identifies the following sectors, which can thrive in country X experiencing ageing population growth:
  • Healthcare and pharmaceuticals
  • Senior housing and assisted living
  • Financial services for retirement planning
  • Leisure and recreation
  • Home care and ageing-in-place services
  • Retail e-commerce

By diversifying their portfolio across these sectors, the investor hedges against the risks associated with an ageing population.

They positioned themselves to benefit from country X’s shifts in demographic dividend.

How can you identify shifts in the demographic dividend of a country and rebalance your portfolio

You can identify shifts in the demographic dividend of a country by analysing:

• Demographic data
• Economic indicators, and
• Market trends
• Let us understand the identification process in simple steps:
  

Step I: Gather demographic data

• Begin by gathering demographic data from reliable sources such as:
  • National statistics agencies
  • International organisations (e.g., United Nations, World Bank), and
  • Research reports
• Consider the following key demographic indicators, such as:
  • Population size
  • Age distribution
  • Fertility rates
  • Mortality rates, and
  • Migration patterns
    

Step II: Track population trends

• Analyse historical demographic trends
• This will help you understand how the population composition has evolved over time.
• Always look for patterns such as:
  • Changes in the proportion of working-age population relative to dependents (children and elderly)
  • Shifts in birth rates and death rates
  • Trends in life expectancy
    

Step III: Perform a sectoral assessment

• Understand how demographic changes are likely to impact different sectors of the economy.
• Usually, certain sectors benefit from demographic trends, like:
  • Healthcare
  • Consumer goods
• Whereas, other sectors face challenges, like
  • Pension funds
  • Labour-intensive industries
• While analysing, you should consider the effect of demographic shifts on:
  • Consumer behaviour
  • Labour market
  • Demand for goods and services

Step IV: Conduct market analysis and diversify

• Look for companies and sectors that are well-positioned to benefit from shifting demographic patterns.
• Make a list of these prospective investment opportunities.
• Try to rebalance your portfolio by diversifying capital allocation across these identified sectors.
  

Conclusion

A country experiences a demographic dividend when it has a larger working-age population in comparison to the dependents. By analysing shifts in the demographic dividend, investors can identify lucrative investment opportunities and rebalance their overall portfolio allocation. To do so, investors must begin by gathering and examining the demographic data. Then, they should perform sectoral assessments and identify sectors poised to benefit from demographic shifts. Diversifying investments across these sectors helps to capitalise on emerging opportunities.