The focus on global demographic changes is growing, prompting both investment professionals and investors to consider the implications for their portfolios.
For some time, the demographic trend of increased life expectancy and declining birth rates has been linked primarily with Asian nations like Japan, South Korea, and China, as well as certain regions in Southern and Eastern Europe. However, it’s evident that this shift is now affecting a broader range of countries, including numerous emerging market economies.
Since the 1950s, the worldwide total fertility rate, representing the average number of children born per woman, has decreased from 5 to approximately 2.3. This figure is approaching the replacement rate of 2.1, which is the fertility rate necessary for a population to maintain stability over time. Moreover, many countries are currently below this replacement rate.
As per United Nations statistics from 2023, Italy (1.3), Japan (1.3), and China (1.2) are significantly below the replacement rate. However, emerging economies like India (2), Bangladesh (1.9), and Iran (1.7) are also below the replacement rate. (South Africa stands at 2.3).
Several nations with the lowest fertility rates also exhibit the highest median ages, as indicated by Central Intelligence Agency (CIA) data. Japan, Germany, and Italy are among the top 10 in this regard. Nevertheless, India (ranked 143rd), South Africa (144th), and Bangladesh (145th) maintain youthful populations. Nevertheless, it is evident that the median age will continue to increase for the majority of countries.
Reassessing the old models
As these patterns intensify and populations age further, the conventional frameworks for pensions and other types of contractual savings will require reevaluation. A significant portion of the industry operates under the premise that contributions from the earnings of younger individuals serve as the foundation for withdrawals made by older retirees.
Yet, with the decline in the percentage of younger, employed investors and members of pension funds, coupled with the increase in retirees (who are also living longer), the capacity of traditional retirement mechanisms to sustain retirees decreases.
Across the globe, policymakers are confronting these challenges and seeking solutions, which may include the prospect of raising the retirement age for workers. Simultaneously, financial advisers and their clients will need to reassess their strategies regarding risk and asset allocation. Given extended life expectancies, the question arises: is it prudent to reduce portfolio risk as investors near retirement and shortly thereafter? Moreover, should investors consider maintaining a higher proportion of equities in their portfolios, contrary to conventional advice advocating for increased allocations to fixed income, cash, and high-dividend equities?
While many investors may instinctively opt to lower their exposure to equities as retirement approaches, this may not necessarily be the optimal strategy considering the prospect of an extended retirement period. Investors will need to explore avenues for capital growth.
Structured products: an investment for managing the demographic shift?
In this setting, structured products assume a pivotal position. Over recent years, investors have increasingly gravitated toward this specific alternative asset class as a valuable means to mitigate volatility in their portfolios during the periods surrounding retirement. This becomes particularly relevant given the current scenario where numerous prominent indices worldwide, such as the S&P 500, Nasdaq, Nikkei 225, and Eurostoxx 600, are reaching unprecedented highs. Structured products offer an effective mechanism for hedging against the risk of market downturns while still enabling participation in potential market upswings.
Nevertheless, structured products can also assist investors in navigating the significant demographic changes mentioned above. By integrating structured products into their portfolios even during retirement, investors can effectively mitigate risks while retaining the opportunity to participate in future equity market growth.
Naturally, this outcome will hinge on the design of the products and the specific investments selected as references, along with the liquidity requirements of investors throughout the duration of each structure. It’s important to note that structured products do not provide dividends.
In summary, although demographic changes appear poised to challenge conventional retirement planning, structured products may become increasingly crucial in aiding investors as they adapt to the evolving retirement landscape.