Silver economy – Investing for population aging
At the heart of this theme is the prediction that the world’s senior population is in the process of doubling from just short of a billion senior citizens at present to over two billion by 2050. This demographic shift is in full motion and will not change from one year to the next. What is appealing about this Supertrend is that whatever the state of the world economy, politics and other more medium-term drivers, population aging will continue, creating needs that are associated with old age in healthcare, insurance and funding solutions, consumer and property markets.
We continue to believe that healthcare is the sector that is most affected by the current demographic shifts. The incidence of many chronic diseases increases with age, which is why a larger elderly population is tied to a disproportionate rise in healthcare expenditure. Healthcare costs are expected to continue to rise at a rate several hundred basis points above GDP growth. This raises an important debate and calls for solutions to contain healthcare costs in spite of demographic developments. Technology can and will play a critical role in providing such solutions. In this context, we refer to our "Technology at the service of humans" Supertrend, which includes healthtech, and which we believe can be considered in conjunction with "Silver economy" investments, for example.
4.1 Old age diseases
Medical progress, too, will look to provide more effective and affordable cures for the diseases or disorders that come with age. Heart disease, for example, is a leading cause of death among the elderly and leads to global costs of USD 500 billion, according to the American Heart Association. Yet heart disease can be treated or avoided if the underlying hypertension or dyslipidemia is addressed. We see a tangible investment case in the area of cardiovascular medical devices, where minimally invasive heart valve replacements, for instance, are associated with a lower interventional burden and better therapeutic outcomes. Cancer, another widespread pathology related to aging, today costs over USD 1.1 trillion annually in physician fees, diagnostics, hospital visits, prescription drugs and other expenses. We are seeing significant amounts of biopharmaceutical companies’ research and development budgets allocated to oncology compared to other therapy areas.
Merger and acquisition activity as a catalyst
Global pharmaceutical companies are further strengthening their pipelines and product portfolios across the spectrum. Numerous mergers and acquisitions are proof of such external growth in this ever-growing market. The largest recent deal in the industry was Takeda offering USD 62 billion to acquire Shire to strengthen its rare diseases portfolio in the area of immunology and hematology. Other large deals in the industry in recent months include Novartis buying AveXis and Gilead buying Kite Pharma, giving the company’s oncology products a better market position. We expect the acquisition trend in the industry to continue, which should further strengthen the business profiles of existing companies.
Regardless of indication, therapeutic area or nature of intervention (drugs, disease or other forms of therapy), we believe that the focus on value-creating innovation is paramount, as it alone ensures negotiating leverage for pharmaceutical companies in a world facing increasing healthcare costs. The cost factor has been highlighted in recent discussions about drug pricing. We focus on companies that have demonstrated strength in innovations.
4.2 Health & life insurance and asset management
Despite efforts to lower healthcare costs and increase efficiency, the need for individual funding solutions for higher longevity and rising healthcare costs will continue to increase globally, representing an important driver for the insurance sector in addition to the healthcare sector. This affects not only developed markets, but increasingly emerging markets as well. Health insurance in particular continues to profit from high structural demand in emerging markets as incomes rise. In emerging economies, out-ofpocket (OOP) expenses typically form a large part of overall health expenditures, with government and compulsory health insurance the second main category. Voluntary health insurance makes up a minor share, but offers growth potential as individual wealth increases (OOP expenses could otherwise threaten to increase poverty, according to the World Health Organization) along with health expenses, which underpins both the affordability and need for health insurance coverage.
Population aging and rising longevity are likely to increase the demand for life insurance products as well. We believe that real gross premiums in life and savings should increase more in underpenetrated regions like Asia and, at a later stage, Africa. Growth is likely to be driven by life annuities, which are the only permitted retirement payout option in some regions. In countries where social security benefits are not sufficiently generous, longer life spans could increase demand for precautionary private savings and liquid assets to cover future expenses, not least for health services. Hence, we expect life insurers to increasingly expand toward so-called unit-linked products on the savings side and simultaneously focus more on protection products for the elderly.
In most developed countries, eligible individuals receive public pension benefits after reaching retirement age. These schemes are administered by governments, which bear the associated costs and risks. Most schemes work on a pay-as-you-go basis, whereby employment-related contributions are used to fund current pensions. The aging population is likely to increase public pension expenditure and, combined with falling support ratios, exert pressure on government budgets. To sustain public pension systems, the retirement age could be raised, which would translate into more savings and increased demand for (capitalprotected) financial products. Aging and low interest rates are putting further pressure on retirement benefit levels and corporate pension funds. Hence, the transition from defined benefit (collective risk sharing) to defined contribution (individual risk bearing) plans will continue. This transition is already making rapid progress in the USA and UK, and we expect a growing market for bulk transactions, where specialized insurance companies take on the pension plan assets and management of large corporates.
As people can rely less and less on public and corporate pension plans, we expect households to increasingly save privately for retirement, so that a part of future pension income will stem from accumulated private assets and savings. While some life insurance products offer a tax advantage, increasing private savings will also require more sophisticated investment products to channel and convert those assets over an individual’s lifetime. With the shift toward defined contribution plans, there will be opportunities for supplementary advisory services in structuring retirement plans/products and asset-liability management.
4.3 Senior lifestyle
Seniors are the fastest-growing consumer age group in the world. The baby boomers already account for around 50%−60% of consumer spending in developed markets. They have a rising share of income compared with other demographic groups and thus increasingly high spending power, especially in the developed world. Euromonitor has projected that the spending power of consumers aged 60+ will double over ten years to reach USD 15 trillion by 2020. Yet very often this cohort is greatly affected by inflation because many retirees live on a fixed income. In the USA, for instance, the inflation index for the elderly rose at a faster pace over the last three decades than inflation for wage earners. Interestingly, though, the spread has narrowed in the most recent decade as price increases of medical care have slowed materially. Further, in Japan, despite broader stagnation, household consumption by seniors has grown gradually, even during recessionary periods, and has outpaced consumption by younger cohorts. In Europe, according to the European Commission, consumer spending of those aged 60+ grew 50% faster in the past two decades than of those under the age of 30. These data points demonstrate that consumers attempt to maintain their lifetime consumption levels by saving during periods of high income and dissaving after retirement.
Sectors exposed to consumption by seniors should display a similar underlying trend of consistent and stable growth. They include leisure and tourism (the 50+ cohort spends over EUR 100 billion per year on tourism), personal care and beauty products ("aging gracefully"), smart homes (a market expected to reach EUR 56 billion by 2020), eyewear, wellness and casinos. The latter have only begun to gain traction in Asia. For instance Japan, home to the world’s oldest population, is now a step closer to awarding casino licenses as early as 2020, rolling out the red carpet to the wealthy elderly. While it will take another few years for the first casino to open its doors in Japan, the industry would most likely see substantial growth by attracting an entirely new clientele in an already gaming-friendly society. Importantly, despite all the focus on developed markets, the aging tidal wave has become a phenomenon in emerging markets too: By 2050, four out of five global seniors are forecast to live in emerging markets. Therefore, we believe that the emerging market angle must be represented appropriately in our "Silver economy" stock selection.
Older people have different needs, priorities and spending patterns than younger cohorts. This can have substantial implications for manufacturers and retailers. What differentiates today’s seniors from earlier senior cohorts is that today’s elderly are increasingly reaching their retirement age in good health, with a considerable number of active years ahead of them. It is thus not surprising that this consumer group uses their above-average spending power on leisure items, be it material goods such as fitness and outdoor gear, mobile homes and even boats and yachts, or experiences such as excursions, premium travel or spending time at gaming resorts and casinos. Notably, cruise lines today report that about two-thirds of demand is coming from elderly people, while casino companies in the USA say that over half of their revenues stems from seniors.
Personal health as well as appearance are other central topics for today’s senior citizens. The aim to age gracefully will likely drive higher spending on personal care and beauty products. In the UK, for instance, women over 60 already account for a quarter of all sales in the beauty category − a number that has more than doubled from a decade ago. Spending intentions are most positive in the skincare category, focused on products with anti-aging labels. In terms of personal health, we expect a stronger emphasis on healthy living to lead to robust demand for vitamins and dietary supplements. Vision impairment, which is highly prevalent among the elderly, should support opportunities among manufacturers of prescription glasses and contact lenses.
4.4 Senior housing and care facilities
As the elderly remain independent and healthier for longer, demand for customized senior housing – compared to today’s solutions, which are often one-size-fits-all – is likely to increase significantly. Senior housing typically starts with barrier-free apartments that are easily accessible by public transport and close to medical care, dining, shopping and recreational facilities. The potential supply of assisted living services (e.g. ambulatory care, household assistance, emergency services) supports a household’s independence and delays the often costly relocation to care or nursing homes, thus enabling the oft-cited aging in place. As the next logical step, we expect senior living operators to increasingly run facilities that consist of multiple units specializing in different disciplines. We see this as increasingly important given the observable shifts in disease patterns of the elderly from physical weaknesses to dementia, both of which are strongly tied to old age and require very specific care.
Along with old age, we often see a range of conditions that require specialized care settings, which can be permanent (in case of a dementia unit/home) or transitory, such as episodic care clinics. The latter can be generalized episodic care clinics, i.e. hospitals, or specialized ones such as dialysis clinics. Patients suffering from chronic kidney disease, a condition often related to old age, would in many cases be able to live independently, but need to visit a dialysis clinic several times a week. Clinics dedicated to episodic care of other conditions also provide crucial services to patients.
In Germany, real estate advisor CBRE estimates that around EUR 55 billion of investment will be needed by 2030 to cope with the future demand for senior housing. As less than 15% of healthcare facilities and housing in Germany are privately owned, we see opportunities for the private sector in a very fragmented market. Similar trends are likely to become visible elsewhere in Europe and increasingly in Asia and Latin America.
The key beneficiaries of this fourth Supertrend are, in our view:
- Healthcare companies in the areas of pharmaceuticals, biotechnology or medical devices that address conditions affecting the elderly, such as cancer, dementia, heart disease or arthritis;
- Consumer companies focusing on the basic needs, but also the more luxurious wants of senior consumers, such as providers of smart home devices, leisure and tourism companies, gaming and casino companies, personal care and beauty product providers or prescription glasses and contact lens manufacturers;
- Health and life insurance companies, private wealth advisors and asset managers with strong pricing capabilities;
- Providers of senior care, assisted living services, senior housing, dementia facilities, ambulatory care and physiotherapy, as well as companies selling domestic appliances and assistance focusing on the needs of the elderly.
For more information, please contact your Credit Suisse advisor.
- Baby boomers: People born between 1946 and 1964 when birth rates spiked globally after the end of World War II.
- Dyslipidemia: Disorder of the amount of lipids in the blood. Hyperlipidemia (i.e. high levels of cholesterol in the blood) is the most common form of dyslipidemia.
- Annuities are financial products that convert invested funds into regular payments. At retirement, insurance companies typically use annuities to transform a retiree’s pension savings into steady cash flows. If payable until the death of the beneficiary, the insurance company assumes longevity risk (i.e. the risk of outliving one’s assets).