What Does Population Aging Mean for Growth and Investments? Paula Campbell Roberts

Transcription

1 What Does Population Aging Mean for Growth and Investments? Paula Campbell Roberts

2 Disclaimer The views expressed in this presentation are the personal views of Henry McVey of Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, "KKR") and do not necessarily reflect the views of KKR itself or any investment professional at KKR. This presentation is not research and should not be treated as research. This presentation does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of KKR. This presentation is not intended to, and does not, relate specifically to any investment strategy or product that KKR offers. It is being provided merely to provide a framework to assist in the implementation of an investor s own analysis and an investor s own views on the topic discussed herein. 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3 Presentation Highlights Impact of population aging on growth and rates Growing importance of 65+, Millennial and Hispanic Cohorts Fragile state of the average Millennial consumer Select investment themes: 1. Healthcare 2. Food 3. Rentership 4. Auto sector disruption 5. E-commerce 6. Infrastructure 3

4 Aging of the Population

5 We Are In the Midst of Significant Demographic Shifts 65+ Proportion of the Population Reaching New Peaks Millennials And Baby Boomers will Remain The Two Largest Demographic Cohorts 25% Proportion Of The Population Over Age 65 US: 2018 Demographics % of Total Population by Age 20% US Global 8% Millennial Baby Boomers 15% 7% 6% 10% 5% 4% 3% 5% 2% 1% 0% % Data as at December 31, Source: US Census, CDC. Data as at December 31, Source: US Census, Morgan Stanley, KKR GMAA Estimates. 5

6 We Are Living Longer And Becoming More Diverse We Are Living Longer 65+, Hispanic and Millennial Populations Will Grow Disproportionately Life Expectancy (Yrs) Change in Size of Select Cohort by Time Period (MM) (projected) (5) (3) Source: US Census, CDC. 6

7 The Result Will Likely Be a Net Negative Effect on the Natural Rate of Interest And Economic Growth, All Else Being Equal Increased Life Expectancy May Depress Rates, All Else Being Equal Holding Productivity Constant, Demographics Alone Will Pressure GDP Growth To Slow Over The Next Decade Changing Demographics and R-star in the United States, % Projections Population Growth Life Expectancy 0.5 Baseline Note: The above depicts three scenarios of the impact of demographics on the neutral rate: The yellow line depicts the total decline in the neutral rate from 3% in 1990 to 1% by The purple line corresponds to the impact driven only by the decline in population growth from 1% in 1990 to 0.3% in The blue line corresponds to what the neutral rate would be if we accounted only for the increase in life expectancy from 75 to 91 years over that period, while holding population growth constant. Data as at March Source: Carlos Carvalho, Andrea Ferrero, and Fernanda Nechio, Demographics and Real Interest Rates: Inspecting the Mechanism, Federal Reserve Bank of San Francisco. 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% US Real GDP Vs Working Age Pop Growth, % Data as at March 30, Source: United Nations, Haver Analytics. r-squared=30% 1970s 1980s 1990s 2000s 2010s 2020s 2030s Real GDP, Estimated (LHS) Real GDP, Actual (LHS) Working Age Population (RHS) 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 7

8 Technological Innovation Can Improve Productivity, But May Also Increase Worker Displacement 10.0% 8.0% 6.0% Productivity Increases Can Mitigate Some of the Decline In Labor Force Growth Labor Productivity Growth 8.6% 5.7% CAGR 4.0% 2.0% 0.0% 1.2% 0.9% 0.4% 0.4% 0.4% 0.3% 0.3% China India Spain US Mexico Japan Brazil Germany UK Worker Displacement Is High in the U.S. and U.K. Percentage of Employees Aged Who Are Displaced From One Year to the Next, Averages, JPN NZL FRA CAN RUS AUS KOR DEU SWE DNK PRT FIN USA GBR Self-Defined Displacement Firm-Identified Displacement Data as at June 23, Source: Bureau of Labor Statistics, United Nations, Haver Analytics. 8

9 Profile of Average Millennial Consumer

10 Millennials Are Underemployed and Under-earning Despite recent improvements, the LFP among millennial households remains below long-term averages Millennial households earn less than their counterparts did ten years ago Labor Force Participation Rate (Millennials), % Inflation-adjusted income for <35 year olds (2016$) Data as at December 3, Source: Federal Reserve Board. Data as at December 31, Source: Bureau of Labor Statistics. 10

11 Baby Boomers Still Hold The Bulk Of US Household Wealth The Bulk Of Household Wealth Is Held By Older Cohorts The 65+ Population Has Experienced Higher Income Growth Relative To Other Age Cohorts Total Household Net Worth By Age Cohort, % Median Inflation-Adjusted Household Income, 10YR CAGR % <35, 2% 35-44, 7% <35 2.0% % 75+, 18% % 65-74, 27% 45-54, 18% 55-64, 28% % 0.0% % Data as at December 31, Source: KKR GMAA, Survey of Consumer Finances. Data as at December 31, Source: Bloomberg. 11

12 Lower Homeownership and Savings Prevalence Among Millennials Homeownership Rates Appear to Have Bottomed But Remain Below Long-Term Averages A Lower Proportion of Millennial Households Are Saving Homeownership Rate (Total vs Under 35 Years of Age, %) Total < Proportion of Families Who Saved, % Total < Data as at December 3, Source: Federal Reserve Board. Data as at December 31, Source: Bureau of Labor Statistics. 12

13 Healthcare and Energy Inflation Are Among The Pressures On Lower And Middle Income Households Healthcare and Gas Spending Represent a Significant Proportion of Lower and Middle Income Household Income Elevated Poverty Rates For The Working Age Population 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 8% 19% Share of Pre-Tax Income (2016) 5% 12% 4% 8% Gasoline expenditures Healthcare expenditures 3% 6% 1% 4% Lowest Second Third Fourth Highest Income Quintile US Poverty Rates By Age Group, % < Source: KKR GMAA, Haver, UN estimates, Bureau Of Economic Analysis, World Bank, OECD, Census data 13

14 Millennials and Those Without a Higher Degree Face Higher Default Risk Year Olds Make Up the Greatest Share of US Consumer Default Risk The Unemployment Rate and Education Levels Go Hand-in-Hand Estimated Proportion of Total Consumer Debt ex-mortgages by Age 65 74, 7% 55 64, 14% 45 54, 16% >=75, 2% 35 44, 26% < 35, 35% $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $ Unemployment Rate and Earnings by Educational Attainment Median Typical Weekly Earnings, US$ $1,664 Doctoral Degree 1.6% $1,380 Master's Degree 2.4% $1,156 Bachelor's Degree 4.4% $819 $ % 2.7% Associate's Degree Some College, No Degree Unemployment Rate $692 High School Diploma 5.2% 7.4% $504 Less Than a High School Diploma 8% 7% 6% 5% 4% 3% 2% 1% 0% Data as at December 3, Source: Federal Reserve Board. Data as at December 31, Source: Bureau of Labor Statistics. 14

15 Implications for Investing

16 #1) Increased Life Expectancy Will Likely Lead to Higher Healthcare and Social Security Costs That Will Strain Government Budgets The Prevalence of Chronic Disease Is Increasing Proportion of 65+ Population with Chronic Disease, % The Expected Increase in the Dependency Ratio Will Likely Lead to Increased Healthcare and Social Security Costs 70% 60% 50% 40% 30% 20% 10% US Total Government Expenditure, % Federal Public Investment Healthcare & Medicare % Population 65+ (RHS) Interest Social Security 0% 8% % 15% 14% 13% 12% 11% 10% 9% Data as at March 30, Source: Office of Management and Budget, National Institute of Health, Haver Analytics. 16

17 #2) Spending on Food and Rental Properties Is Also Likely to Increase Asians Spend More On Education, Elders Spend More On Healthcare, While Hispanics & Millennials Spend On Rent US Consumer Wallet Allocation vs Benchmark (2016) 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% Food at Home Hispanic allocation to food at home Food Away from Home Hispanics Asians Owned Homes Millennial and Hispanic spend on rent Elders spend on healthcare Rent Apparel Used Cars Vehicle Fuel Healthcare Education Asians spend on education Data as at December 31, Source: KKR GMAA, Consumer Expenditure Survey. 17

18 #3) Higher Rentership Prevalence Is Likely Here to Stay Decline In Homeownership Rates Across Age Categories Surge in High Income Renters Surge in Senior Renters 90% US: Homeownership Rates (%) % Distribution Of Renter Household Growth ( ) 80% 70% 60% 50% 40% 30% 20% 10% 90% 80% 70% 60% 50% 40% 30% 20% 10% <35, 25% 35-44, 14% 44-54, 17% 55+, 44% 0% < % By Age Cohort Ddata as at December 31, Source: US Census, Bureau of Labor Statistics, Consumer Expenditure Survey, Bureau of Economic Analysis, Mortgage Bankers Association, Haver Analytics, Morgan Stanley, KKR GMAA Analysis. 18

19 #4) Further, The Sharing Economy Will Continue To Disrupt Sectors, E.g., Autos Driver Penetration Falls With Age; Gender Gap In Drivers Begin To Widen Once Retirement Hits Increased Ridesharing Penetration May Lead To Even Lower Proportions Of Licensed Drivers US Drivers as % of Population By Age (2015) Licensed Driver % Vs Ridesharing Growth 100% Total Male Female 160% 140% 85.5% 145% 86% 85% 80% 60% 40% 20% 120% 100% 80% 60% 40% Growth In Ridesharing Sole Proprietorships ( , LHS) Licensed % Of Eligible Population (2015, RHS) 48% 32% 83.9% 84% 83% 82% 81.2% 81% 0% 20% 80% 0% MO US CA 79% Data as at December 31, Source: KKR GMAA, Census. 19

20 #5) There Has Also Been A Shift in Consumer Spending via E-commerce Disposable Income Available For Traditional Things is Waning At a Time of Significant Change in Consumer Spending Share of Consumer Wallet 32% 30% 28% 26% 24% 22% 20% 18% Healthcare % of Total Spend, LHS Tech/Telecom/Media % of Total Spend, LHS Rent % of Total Spend, LHS Brick & Mortar % of Total Retail, RHS 100% 99% 98% 97% 96% 95% 94% 93% 16% % Data as at December 31, Source: Bureau of Economic Analysis, KKR GMAA analysis. 20

21 #6) Finally, Rapid Urbanization and Aging Assets Are Driving Increased Demand for Infrastructure Investment Percentage Urban We Expect Urbanization to Continue With 66% of the Population In Urban Areas By 2050, from 47% in Percentage Urban by Age Group and Region, World Africa Asia Oceania Europe Latin America and Caribbean All Ages 0-14 years years years 60 years or over North America $3.7 Trillion Annual Infrastructure Investment Needed To Keep Pace With Projected GDP Growth The Network Infrastructure Necessary to Support Global Economies Projected GDP Growth, Average Annual Need, , Annual Spending as a % of Aggregate Spending, , USD Trillions GDP USD Trillions Ports Airports Rail Water Telecom Roads Power Total Data as at December 31, Source: McKinsey, Census Bureau, KKR GMAA analysis. 21

22 Q&A and Discussion

23 Key Themes Discussed Impact of population aging on growth and rates Growing importance of 65+, Millennial and Hispanic Cohorts Fragile state of the average Millennial consumer Select investment themes: 1. Healthcare 2. Food 3. Rentership 4. Auto sector disruption 5. E-commerce 6. Infrastructure 23