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David Kimberley
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Updated 20 Jan 2023
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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

Just over 2,000 years ago, the Roman emperor Augustus instituted a series of reforms aimed at increasing the birthrate among the empire’s upper classes. Adultery was made a crime and men who didn’t have children were not allowed to inherit or attend public games. Couples that had three children were given several legal privileges, with those radical Romans even going so far as to allow woman, as long they were freeborn and had three children, to receive an inheritance.

The impact of the reforms is thought to have been minimal, although many people purportedly tried to find loopholes in them so they could enjoy the benefits they conferred. Technocrats of the 21st century are likely to sympathise with Augustus. For decades now they’ve been trying to suggest reasons why people in developed countries are not having children and come up with ways to try and make them do so.

Unfortunately this is not an easy thing to accomplish. Only one country in Europe today appears to have a birthrate that is above replacement level – the Faroe Islands. This is also the case in much of East and Southeast Asia. In fact, Israel is most likely the only (relatively) large, developed country in the world that has a fertility rate which is above replacement levels.

Lots of theories as to why this is the case have been proffered. Urbanisation, increasingly secular societies, a breakdown in the family structure, high property prices, expensive childcare and more working women are just some of them. Policymakers have been doing lots to try and reverse the trend. Hungary, for instance, has given families with three children grants to buy new homes, capped-interest loans and tax reductions. Singapore also provides parents with over £5,000 in benefits per child and its government recently hinted at increasing that amount.

Hungary’s policies are among the more generous but they were only instituted in 2015, so it is hard to say whether or not they’ve worked. Looking at past efforts it seems plausible they won’t and that ultimately there is no clear way to get people to have more children – humans are weird and it’s hard to figure out exactly what motivates their behaviour. Hard as it may be for technocrats to understand, we are not infinitely malleable and something as meaningful as parenthood may simply not be possible to manipulate via public policy.

Nonetheless, population growth seems to nearly always be on the minds of investors. A major reason that Japan, for example, tends to attract lots of pessimism is because of its declining population.

We saw something akin to this playing out this week as China announced its first year-on-year population decline since 1961. Given that the world’s second-largest economy has been a core driver of global economic growth, and thus often a significant component of portfolios, this means investors may have to rethink things.

Trader turned author Satyajit Das, who is always a pleasure to read because you realise you aren’t the most pessimistic person in the world, has argued that much of the functioning of the global economy today is predicated on a kind of perpetual growth, which is partly fuelled by an ever-increasing population. As populations decline, it means we’ll either have to change systems or watch them break.

Some governments have attempted to prevent this from happening by using immigration. Today, almost 15% of the UK’s population were born abroad – and this is not including those whose forbearers moved here in the past and are now citizens. Canada is also attempting to bring approximately 1.5m immigrants into the country from this year through to the end of 2025, which would represent close to 4% of the population today.

China is unlikely to do the same. It is extremely difficult to obtain Chinese citizenship and the government already has tough regulations governing internal migration, let alone foreign nationals. Although it’s not as strict, Japan is similar. Foreign residents only make up about 2% of the population and even then a sizeable proportion of them are ethnic Japanese whose ancestors migrated to Latin America, particularly Brazil.

One of the country’s solutions to its problems has been to try and automate work, either via robotics or digitization. This is part of what JPMorgan Japan Small Cap Growth & Income (JSGI) attempts to tap into. The trust invests in several so-called ‘new Japan’ companies, which are often geared towards solving the problems that an aging population presents.

It’s a somewhat similar story with Allianz Technology Trust (ATT). The managers are not looking at demographics and attempting to pick stocks to invest in based on that information, but they have argued that a smaller workforce often results in more spending on technology to try and automate tasks. Speaking to shareholders at the end of 2021, manager Walter Price, who retired last year, noted that labour shortages could result in a “golden age for technology.”

“Technology can be used to pick up tedious and repetitive tasks for which it is increasingly difficult to recruit,” he said. “This might include anything from manual processing of insurance claims to autonomous driving for trucks or cars.”

Making top-down picks on demographic trends is unlikely to result in good results. However, population dynamics also shouldn’t be ignored, given that much of our economy is dependent on them. Assuming China’s population does continue to decline, it’s possible they may end up in a situation that many in the country had been dreading – that they got old before they got rich.

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