Market commentary: Jul 2024
Investment performance
The great surge in market prices of the “Magnificent 7” (Microsoft, Google, Amazon etc) has driven the US share market to all time highs over the last year. This excitement may well be justified but what about the other 493 companies on the US S&P500? We are seeing signs that attention is moving to these so called “old economy” stocks that are selling at attractive prices and will benefit from lower interest rates.
International equities made the biggest contribution to our client portfolio returns. Earnings of most companies in the US S&P500 have exceeded expectations and excitement around the possibilities of artificial intelligence has fuelled share prices.
Interest topic: Demographic change and investing
Pengana Capital Group are an international equity fund manager and when thinking about what drives long term equity returns, they look at global trends. One of these is changing demographics.
Demographic change is reshaping the global population as birth rates fall and populations age. This is causing shifts in the composition of the workforce which impacts economic activity and investment returns. Opportunities for some companies but risks for others.
Three factors driving demographic change:
Falling birthrate as women achieve higher levels of education and pursue careers. High housing costs and debt are delaying having children.
Falling death rate due to improved health care, health awareness and treatment of age-related conditions.
Migration of young people from poorer countries looking for better opportunities in developed countries.
Why does this matter to economic activity?
As population decreases so does the rate of productivity growth and the size of a country’s economy. This impacts living standards.
When populations age, public spending shifts from education, training and infrastructure, which boost productivity growth, to healthcare and superannuation which do not. Also, this coincides with relatively fewer young people paying taxes to fund public spending.
What are the investment implications?
The demographic trend will, over the long term, lead to higher interest rates and lower economic growth. Companies that have strong balance sheets, and can absorb higher interest rates, will be able to take advantage of opportunities in this evolving environment and grow earnings. An example is healthcare and leisure services.
Labour shortages in developed countries (if not filled by immigration or outsourcing) will create opportunity for companies to grow earnings by applying technological solutions such as automating manufacturing processes. Labour shortages will also accelerate the adoption of artificial intelligence creating further opportunities for growth.
Demographic change is a long-term global trend that is driving changes in economic activity and therefore investment markets. It’s something that fund managers consider when making investment decisions.
Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFPCM), Director and Financial Adviser