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US News Mason Williams Chief Investment Officer

How to Invest in a Global Aging Economy

Health care, luxury travel and senior housing have lots of growth ahead thanks to global demographics. 
U.S. News & World Report 
By Coryanne Hicks | May 28, 2018


Senior housing is less sensitive to economic downturns, making it particularly attractive to investors.

We're growing old. Not just individually but the world's population as a whole.

"For the first time in recorded history, the number of children under the age of 5 no longer outnumber those 65 and above," says George Evans, chief investment officer for equities at OppenheimerFunds in New York.

By 2030, adults older than 60 will outnumber children younger than 10, according to research by the United Nations Population Division. "Lower fertility rates and increased life expectancies are transforming demographics" across the globe, says Dan LaPlante, chief investment officer for private wealth management at Citizens Bank. While Europe and North America have the fastest aging populations, by 2050, nearly 25 percent of the population in every region on both continents will be seniors.

As they grow in number, seniors will control an increasing proportion of global wealth and spending, and that has new implications for investors. "Longevity lends itself to a lot of growth opportunities" for investors, says Joe Quinlan, head of market and thematic strategy for Bank of America's wealth management division in New York. To find them, you only need to follow the money trail from seniors' spending patterns.

Where health care is concerned, think broadly. Health care is one of the biggest expenses for seniors and, by extension, global economies. According to the Organization for Economic Cooperation and Development, health care spending by its 35 member countries could rise to 14 percent of gross domestic product by 2060 (up from 9.5 percent in 2010).

Within the health sector, "diversified pharmaceutical and consumer stocks like Johnson & Johnson (ticker: JNJ) should continue to perform well," says Mason Williams, chief investment officer for Coral Gables Trust Co. in Coral Gables, Florida. "Drug manufacturers, like Merck (MRK) and Pfizer (PFE), should also benefit as they continue to bring new drugs to market."
 
The biotechnology sector, which investors can access through exchange-traded funds like iShares Nasdaq Biotechnology (IBB), is another area of potential growth. But biotech and pharmaceuticals stocks can be volatile. Broad-based health care ETFs like iShares Global Healthcare (IXJ) may be more stable, or investors can target the real estate needs of health care companies through real estate investment trusts specializing in health care properties.
 
Health care REITs provide both income and exposure to an aging population, Williams says. Two big REITs are Ventas (VTR), which holds "one of the highest quality health care real estate portfolios" in the U.S., and Welltower (WELL), which is the largest health care REIT in the world with assets in Canada, the U.K. and the U.S., he says.
 
The health sector is more than drugs, Quinlan says. For instance, medical, diagnostic and caregiving equipment all have opportunities for growth. He says Bank of America's wealth management division is "very bullish on caregiving robotics," particularly the Japanese variety. Many of these robots are developed in Japan, which is struggling to address the care of seniors amid a shrinking working-age population.
 
Similarly, "anything that helps you monitor your own health and fitness is going to do very well in this environment," Quinlan says, because today's active seniors are not only outliving their ancestors but also out-stepping them.
 
Today's seniors like to travel. Today's retirees are leading more active lifestyles, and their spending patterns reflect this. "This is the healthiest aging cohort in the history of mankind," Quinlan says. They're buying Fitbits to measure their steps and athletic wear to walk in. And they're setting sail to luxury travel destinations.
 
Retirees have more time for leisure, but not just any leisure will do. They're more likely to take a cruise than backpack across Europe and prefer high-end hotels over hostels.
 
"As seniors retire and look forward to global travel, cruising is an easy and convenient way to see the world," Williams says. The industry leaders are Royal Caribbean Cruises (RCL) and Carnival Corp. (CCL) "with their worldwide footprint and growing fleet."
 
In addition to cruise lines, investors can target other areas of the leisure market such as airlines, luxury hotel chains like Marriott International (MAR) and Hyatt Hotels Corp. (H), or even luxury concierge services that cater to high-end travelers.
 
Senior housing is less sensitive to recessions. When they aren't traveling, today's seniors are increasingly found in independent and assisted living communities. The decision to move into senior housing is often need-based rather than income-based, so demand for senior communities is not closely linked to the business cycle. As a result, senior housing is less sensitive to economic downturns, making it particularly attractive to investors, according to research by global investment management firm PGIM in its report "A Silver Lining: The Investment Implications of an Aging World."
 
Welltower invests two-thirds of its portfolio in senior housing, Williams says. Other REITs that specialize in senior housing, like the Senior Housing Properties Trust (SNH), can also provide diversified access to this market.
 
Aging emerging markets come with added volatility. While emerging markets have been the slowest to age, they are by no means youthful. In 22 years, the populations of Brazil and Mexico will be almost as old as that of the U.S., according to the Center for Strategic and International Studies. Emerging markets like China, South Korea and Singapore will be even older.
 
Like their developed brethren, aging emerging market populations offer investors many opportunities for growth, according to Crit Thomas global markets strategist at Touchstone Investments. He sees emerging markets as "a longer-term bright spot," but they're not without risk.
 
"Political risk tends to be higher in emerging markets and could add volatility," LaPlante says. "Demographics vary from one country to the next, so investors should not assume that all emerging market economies will be impacted in a similar manner." Safer bets are countries with growing working-age populations, he says.
 
Temper your return expectations. No matter where and how you invest in our aging economy, don't expect overnight results. "Demographics is a secular trend and moves very slowly," Thomas says. This isn't a get-rich-quick opportunity, and investors should adjust their return expectations accordingly.
 
Our aging population and the industries most likely to benefit are no secret and are "already considered in valuations and growth forecasts," Thomas adds.
 
Investors will face competition from others "trying to capitalize on the changing demographic landscape," LaPlante says. So even if you successfully identify a long-term thematic trend, there's no guarantee your investment will be successful. To reduce risk and increase your chances of success, diversify across countries, companies and industries.

Read the full article from U.S. News & World Report here.