Markets
The Demographic Timebomb: A Rapidly Aging Population
With record-high amounts of student debt, questionable job prospects, and too much avocado toast in their bellies, many millennials already feel like they are getting the short end of the stick.
But here’s another economic headwind they face as they are coming of age: the percentage of the global population that is 65 or older will double from 10% to 20% by 2050.
As millennials enter their peak earning years, there will be 1.6 billion elderly people on the planet.
Someone Has to Pay the Bill
Today’s infographic comes to us from Aperion Care, and it highlights how demographics are shifting as well as the economic challenges of a rapidly aging global population.
With an older population that works less, support and dependency ratios get out of whack.
After all, countries already spend trillions of dollars each year on healthcare and social security. These systems were designed a long time ago, and were not setup to work with so few people paying into the programs.
Which Countries Face Headwinds?
While most countries face similar obstacles with aging populations, for some the problem is more severe.
The Potential Support Ratio (PSR), a measure of amount of working people (15-64) for each person over 65+ in age, is anticipated to fall below 5.0 in countries like Japan, Italy, Germany, Canada, France, and the United Kingdom. These countries will all have significant portions of their populations (>30%) made up of elderly people by 2050.
The United States sits in a slightly better situation with 27.9% of its population expected to hit 65 or higher by the same year – however, this is still analogous to modern-day Germany (which sits at 27.6%), a country that is already dealing with big demographic issues.
Here’s one other look, from our previous Chart of the Week on dropping fertility rates and global aging:
Will millennials be able to diffuse the demographic timebomb, or will an aging population be the final straw?
Markets
Recession Risk: Which Sectors are Least Vulnerable?
We show the sectors with the lowest exposure to recession risk—and the factors that drive their performance.
Recession Risk: Which Sectors are Least Vulnerable?
This was originally posted on Advisor Channel. Sign up to the free mailing list to get beautiful visualizations on financial markets that help advisors and their clients.
In the context of a potential recession, some sectors may be in better shape than others.
They share several fundamental qualities, including:
- Less cyclical exposure
- Lower rate sensitivity
- Higher cash levels
- Lower capital expenditures
With this in mind, the above chart looks at the sectors most resilient to recession risk and rising costs, using data from Allianz Trade.
Recession Risk, by Sector
As slower growth and rising rates put pressure on corporate margins and the cost of capital, we can see in the table below that this has impacted some sectors more than others in the last year:
| Sector | Margin (p.p. change) |
|---|---|
| 🛒 Retail | -0.3 |
| 📝 Paper | -0.8 |
| 🏡 Household Equipment | -0.9 |
| 🚜 Agrifood | -0.9 |
| ⛏️ Metals | -0.9 |
| 🚗 Automotive Manufacturers | -1.1 |
| 🏭 Machinery & Equipment | -1.1 |
| 🧪 Chemicals | -1.2 |
| 🏥 Pharmaceuticals | -1.8 |
| 🖥️ Computers & Telecom | -2.0 |
| 👷 Construction | -5.7 |
*Percentage point changes 2021- 2022.
Generally speaking, the retail sector has been shielded from recession risk and higher prices. In 2023, accelerated consumer spending and a strong labor market has supported retail sales, which have trended higher since 2021. Consumer spending makes up roughly two-thirds of the U.S. economy.
Sectors including chemicals and pharmaceuticals have traditionally been more resistant to market turbulence, but have fared worse than others more recently.
In theory, sectors including construction, metals, and automotives are often rate-sensitive and have high capital expenditures. Yet, what we have seen in the last year is that many of these sectors have been able to withstand margin pressures fairly well in spite of tightening credit conditions as seen in the table above.
What to Watch: Corporate Margins in Perspective
One salient feature of the current market environment is that corporate profit margins have approached historic highs.
As the above chart shows, after-tax profit margins for non-financial corporations hovered over 14% in 2022, the highest post-WWII. In fact, this trend has been increasing over the past two decades.
According to a recent paper, firms have used their market power to increase prices. As a result, this offset margin pressures, even as sales volume declined.
Overall, we can see that corporate profit margins are higher than pre-pandemic levels. Sectors focused on essential goods to the consumer were able to make price hikes as consumers purchased familiar brands and products.
Adding to stronger margins were demand shocks that stemmed from supply chain disruptions. The auto sector, for example, saw companies raise prices without the fear of diminishing market share. All of these factors have likely built up a buffer to help reduce future recession risk.
Sector Fundamentals Looking Ahead
How are corporate metrics looking in 2023?
In the first quarter of 2023, S&P 500 earnings fell almost 4%. It was the second consecutive quarter of declining earnings for the index. Despite slower growth, the S&P 500 is up roughly 15% from lows seen in October.
Yet according to an April survey from the Bank of America, global fund managers are overwhelmingly bearish, highlighting contradictions in the market.
For health care and utilities sectors, the vast majority of companies in the index are beating revenue estimates in 2023. Over the last 30 years, these defensive sectors have also tended to outperform other sectors during a downturn, along with consumer staples. Investors seek them out due to their strong balance sheets and profitability during market stress.
| S&P 500 Sector | Percent of Companies With Revenues Above Estimates (Q1 2023) |
|---|---|
| Health Care | 90% |
| Utilities | 88% |
| Consumer Discretionary | 81% |
| Real Estate | 81% |
| Information Technology | 78% |
| Industrials | 78% |
| Consumer Staples | 74% |
| Energy | 70% |
| Financials | 65% |
| Communication Services | 58% |
| Materials | 31% |
Source: Factset
Cyclical sectors, such as financials and industrials tend to perform worse. We can see this today with turmoil in the banking system, as bank stocks remain sensitive to interest rate hikes. Making matters worse, the spillover from rising rates may still take time to materialize.
Defensive sectors like health care, staples, and utilities could be less vulnerable to recession risk. Lower correlation to economic cycles, lower rate-sensitivity, higher cash buffers, and lower capital expenditures are all key factors that support their resilience.
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