Dec. 21, 2012, 6:31 a.m. EST
How to invest for the aging-U.S. trend
Every now then there’s an overarching trend that reveals which investments to avoid or to consider. And so it is with a recent report from Census Bureau that suggests what we’ve known for a long time, but must revisit: There’s going to be a boatload of older Americans in this country over the next few decades.
For instance, the number of Americans age 65 and older is expected to more than double between 2012 and 2060, from 43.1 million to 92.0 million. Put another way, some one in five Americans will be age 65 and older by 2060, according to Census Bureau.
So what might investors do given the report from the Census Bureau?
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The changing demographics in the U.S. pose challenges and opportunities for investors, said Jeff Witt, who is director of research at Private Asset Management and president of the CFA Society of San Diego.
“Traditional economic theory holds that growth in a country’s GDP is a function of growth in a countries workforce, productivity and physical capital,” said Witt. “Therefore an aging population has the potential to lead to slower GDP growth, as the growth in the workforce abates.”
However, given the severity of the recent recession, Witt said we are not seeing older worker leaving in mass due to financial constraints. “Moreover, other demographic changes, such as immigration, have also mitigated the decline in workforce due to an older population,” he said.
What to consider
It would appear unanimous: Health care is the place to be. “Obviously, health-care companies should do well as the population ages,” said Vahan Janjigian, the chief investment officer at Greenwich Wealth Management.
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Witt agreed. “The health-care sector should also benefit from the aging population base in the U.S. as a majority of health expenses occur in the latter part of life,” he said. “Furthermore, there are several medical conditions that have a higher prevalence in minority populations.”
Diabetes is one such example, since the risk of contracting the condition increasing with age and it has a higher occurrence in minority populations, said Witt who also noted that there are several companies creating novel treatments for the disease or the monitoring of glucose levels.
Janjigian likes businesses that “help provide low-cost effective care aimed at keeping seniors out of institutions.”
And one of Janjigian’s favorites in the area is Amedisys (NASDAQ:AMED) . The company helps keep patients, most of whom are elderly, out of hospitals by providing health care services directly in their homes, he said. It also has a growing hospice segment.
Although potential cuts in Medicare funding could have a detrimental impact on revenues, the bottom line is that it is cheaper to provide health care services in the home than it is to provide them in hospitals,” Janjigian said.
Janjigian also likes medical device manufacturers despite the 2.3% excise tax that kicks in on Jan. 1. One company to consider is C.R. Bard (NYSE:BCR) , which specializes in making devices that address the needs of the vascular, urology, oncology, and surgical specialty products markets. “These are exactly the kinds of problems commonly found in the elderly population,” he said.
Witt also said that the domestic real estate market will also be greatly impacted by the demographic shift in the U.S. However, “the final outcome is somewhat obfuscated by countering forces,” he said.
“Retirees have traditionally downsized real estate, as these ‘empty nesters’ no longer need housing to support a large family,” he said. “This seems to indicate slower long-term growth for the single-family housing market; however, minority and immigrant populations have traditionally had larger family sizes relative to nonminority white families.”
This increase in the aggregate family size could have the potential to drive more families into single-family housing, he said. “While the ultimate impact to the single family housing market is unknown, it does appear that the demand for retirement-related living facilities is set to significantly grow,” said Witt.
What to avoid
The stocks to avoid because of the aging population are not as obvious as the ones to consider, according to Janjigian. And that’s primarily because “many companies that cater to the young will be able to transform themselves to meet the needs of an aging population,” he said.
Still, there are at least two companies—Polaris Industries (NYSE:PII) and Harley-Davidson (NYSE:HOG) (HOG) —that might struggle as the population ages, Janjigian said. “These companies specialize in recreational vehicles such as motorcycles and snow mobiles,” he said. “Despite the stereotypical image of aging baby-boomers cruising around on motor bikes, I don’t see these kinds of companies thriving in future decades.”
Emerging trends suggest emerging markets
Witt also noted the aging demographic is not just a U.S. problem, but is occurring in a significant number of developed countries. “For instance, both Japan and Europe have aging population concerns more acute than America,” he said. “In many emerging markets, however, this is not a problem and their workforces are continuing to rapidly grow.”
And this is one of the reasons why emerging markets will likely be the engine of global growth in the future, said Witt. “Therefore, investments in foreign or multinational companies with emerging market exposure have the opportunity to benefit from these growth trends,” he said.
Robert Powell is editor of Retirement Weekly, published by MarketWatch. Learn more about Retirement Weekly . Follow his tweets @RJPIII .
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